finding knowledge is not required under Indiana law but also holding that the transferee had knowledge assuming that State law required such knowledge
How later courts described this case
- finding knowledge is not required under Indiana law but also holding that the transferee had knowledge assuming that State law required such knowledge
Written by the judges who cited it.
The opinion
T.C. Memo. 2016-142
UNITED STATES TAX COURT
THOMAS L. WEINTRAUT, TRANSFEREE, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 6505-12, 6715-12, Filed July 27, 2016.
6751-12.
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
1
Cases of the following petitioners are consolidated herewith: Curtis D.
Fankhauser, Transferee, docket No. 6715-12; and Cynthia A. Fankhauser,
Transferee, docket No. 6751-12.
-2-
[*2] 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
-3-
[*3] 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
2
As discussed below, in the respective answers in these cases, respondent
conceded that the Federal unpaid deficiency in tax of ffi Corp. for its taxable year
2001 is $578,338.43.
3
All section references are to the Internal Revenue Code in effect at all
relevant times. All Rule reference are to the Tax Court Rules of Practice and
Procedure.
4
See supra note 2.
5
As discussed below, in the notice of liability issued to petitioner Cynthia
A. Fankhauser, respondent did not limit Ms. Fankhauser’s transferee liability to
the extent of the net value of the assets that FFI transferred to her, which respon-
dent determined in that notice was $233,877.44.
-4-
[*4] 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 cor-
poration 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
6
See supra note 2.
7
See supra note 2.
-5-
[*5] laws of the State of Indiana. On February 6, 1959, the articles of incorpo-
ration 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
8
During 2001 until at least the time of the trial in these cases, Mr. Wein-
traut’s license as a C.P.A. was in an inactive status.
-6-
[*6] 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 com-
panies. 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
9
Mr. Fankhauser’s education at the University of Missouri did not include
any classes in accounting or business. At the time of the trial herein, Mr. Fank-
hauser had been using a tax return preparer to prepare his tax returns.
10
We shall sometimes refer collectively to Mr. Fankhauser and Mr. Wein-
traut as FFI’s officers.
-7-
[*7] 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 out-
standing 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. Wein-
traut, and Ms. Fankhauser owned 68 percent, 22 percent, and 10 percent, respec-
tively, of FFI’s outstanding stock. (During the times Mr. Fankhauser, Mr. Wein-
traut, 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-
-8-
[*8] 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 pro-
spective 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,
11
When FFI retained Banc One in 2000, it was in the business of offering
investment banking services and financial advisory services.
-9-
[*9] 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 dis-
solve 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
12
In the mid-1990s, Mr. Fankhauser and Mr. Weintraut started retaining Mr.
Thrapp to represent FFI in certain matters. Around December 1, 2000, FFI
terminated Banc One’s services.
- 10 -
[*10] 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 con-
dition precedent to the December 19, 2000 plan of liquidation was satisfied.
On or before May 21, 2001, FFI sold to unrelated third parties for approx-
imately $1,063,645 certain assets that GSI had not agreed to purchase in the FFI
asset sale agreement, including certain of FFI’s automobiles and certain of its
manufacturing equipment (FFI May 21, 2001 asset sale).
FFI anticipated that it would have a significant Federal income tax liability
and a significant State income tax liability (sometimes collectively, Federal and
State income tax liabilities) as a result of the FFI asset sale and the FFI May 21,
2001 asset sale. As of October 1, 2001, FFI had made on the dates indicated the
following Federal estimated income tax payments for its taxable year 2001 totaling
$625,000 (sometimes, FFI Federal 2001 estimated income tax payments):
Date Payment
4/17/2001 $225,000
6/15/2001 225,000
10/1/2001 175,000
Total 625,000
- 11 -
[*11] In addition to the FFI Federal 2001 estimated income tax payments of
$625,000 that FFI had made as of October 1, 2001, it had an overpayment credit of
$3,592 for its taxable year 2001 that was attributable to its taxable year 2000. (We
shall refer to the total (i.e., $628,592) of the FFI Federal 2001 estimated income
tax payments of $625,000 and FFI’s Federal overpayment credit for its taxable
year 2001 of $3,592 as the FFI Federal 2001 income tax payments.)
On October 5, 2001, the FFI stockholders voted to dissolve FFI in accor-
dance with the December 19, 2000 plan of liquidation.
On October 19, 2001, FFI sold for $3,250,000 the Elmwood property (FFI
Elmwood sale) to an unrelated company known as 5900 Elmwood Avenue, LLC
(Elmwood Avenue LLC). Elmwood Avenue LLC paid $1 million of that
$3,250,000 purchase price by executing a promissory note for $1 million (Elm-
wood Avenue LLC note) that was payable to FFI. (We shall sometimes refer
collectively to the FFI asset sale, the FFI May 21, 2001 asset sale, and the FFI
Elmwood sale as the FFI 2001 asset sales.)
On October 19, 2001, FFI took certain steps in preparation for its planned
liquidation and dissolution, including (1) filing articles of dissolution with the
secretary of state of Indiana (Indiana secretary of state); (2) informing the attorney
general of Indiana (Indiana attorney general) and the Department of Workforce
- 12 -
[*12] Development of Indiana that it was dissolving; (3) mailing Form IT-966,
NOTICE OF CORPORATE DISSOLUTION LIQUIDATION OR WITH-
DRAWAL (Form IT-966), to the Department of Revenue of Indiana; and (4)
mailing Form 966, Corporate Dissolution or Liquidation (Form 966), to the
Internal Revenue Service (IRS). Form 966 that FFI completed and mailed to the
IRS indicated that FFI’s “(anticipated) [l]ast month, day, and year of final tax
year” was December 31, 2002.
As of November 30, 2001, FFI had made State estimated income tax pay-
ments for its taxable year 2001 totaling $157,700 (FFI State 2001 income tax
payments). Of those payments, FFI had paid $152,000 to the State of Indiana and
the remaining $5,700 to certain other States.
After the FFI 2001 asset sales, FFI had no operations, no employees
engaged in operations, no income, and no operational assets (except certain
oxidation technology).
FFI, Petitioners, and MidCoast
Mr. Thrapp was aware that FFI had agreed to, and did, sell to unrelated third
parties most of its assets, including all of its operating assets (except certain
oxidation technology), and that it not only intended but also had taken formal
steps to liquidate and dissolve. Nonetheless, on December 7, 2001, he informed
- 13 -
[*13] the FFI officers (i.e., Mr. Fankhauser and Mr. Weintraut) that MidCoast
Credit Corp.13 might be interested in purchasing their FFI stock and the FFI stock
of Ms. Fankhauser at a so-called premium; that is to say, MidCoast might be in-
terested in purchasing all of the FFI stock for an amount that was greater than the
liquidation value of FFI, i.e., the value of FFI’s assets after the payment of its
liabilities, including its Federal income tax liability and its State income liability
for its taxable year 2001.14 Mr. Thrapp informed the FFI officers that the purchase
price for the stock that MidCoast usually paid in deals like the one that it was sug-
gesting to FFI and the FFI stockholders was calculated by using a percentage of
the total of the acquired company’s Federal income tax liability and State income
tax liability, which varied from acquisition to acquisition but was within a range
that MidCoast had established.
At all relevant times, MidCoast was a subsidiary of Shorewood Holding
Corp. (Shorewood) and was part of the consolidated group of corporations for
13
For convenience, we shall sometimes refer to MidCoast Credit Corp. and
any other company that was related to, or that was a designee of, MidCoast Credit
Corp. as MidCoast.
14
Mr. Thrapp had some familiarity with MidCoast because it was a client of
Ice Miller with respect to a transaction that was unrelated to the transactions here-
in and that closed in November 2001. Mr. Thrapp considered the information that
Ice Miller obtained as a result of that representation to be privileged.
- 14 -
[*14] which Shorewood filed consolidated tax returns. At those times, Michael
Bernstein (Mr. Bernstein) and Honora Shapiro (Ms. Shapiro)15 each owned 50
percent of the outstanding stock of Shorewood.
Mr. Thrapp, who was not an attorney specializing in Federal income tax
matters and who was not qualified to provide advice with respect to such matters,16
understood and advised the FFI officers that MidCoast had a Federal income tax
and State income tax deferral strategy (tax strategy) that it considered to be
proprietary and that consequently it would not share any details about that tax
strategy with them. Mr. Thrapp further understood and informed the FFI stock-
holders that MidCoast had used its tax strategy as part of an acquisition methodol-
ogy in which it acquired for cash certain C corporations with cash and certain
Federal and State income tax liabilities. Mr. Thrapp did not know any of the
details of MidCoast’s acquisition methodology or its tax strategy.17 However,
15
Ms. Shapiro died before the trial in these cases.
16
For convenience, we shall refer to an attorney or any other person who
specializes in Federal income tax matters and who is qualified to provide advice
with respect to such matters as a tax professional.
17
Even if Mr. Thrapp had known, through Ice Miller’s representation of
MidCoast, some or all of the details regarding MidCoast’s acquisition meth-
odology and its tax strategy, he would not have been able to disclose any such
details to Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser. That was because
(continued...)
- 15 -
[*15] it was Mr. Thrapp’s understanding, which he shared with the FFI officers,
that MidCoast used the cash of an acquired C corporation in order to buy charged-
off debt securities that MidCoast intended to use in its so-called asset recovery
business, but he had no understanding of how MidCoast used those securities as
part of its tax strategy.
Mr. Weintraut and Mr. Fankhauser made only certain limited inquiries of
Mr. Thrapp with respect to MidCoast’s overall acquisition methodology, including
its tax strategy, of acquiring C corporations. However, Mr. Weintraut and Mr.
Fankhauser, directly or through Mr. Thrapp, and Ms. Fankhauser, through Mr.
Fankhauser, knew that MidCoast’s pricing in its acquisition methodology was
inextricably intertwined with its tax strategy.
On December 7, 2001, the day on which Mr. Thrapp informed the FFI
officers about MidCoast’s possible interest in purchasing the stock of FFI, the FFI
officers, Mr. Thrapp, and FFI’s accountants, Patrick Burns (Mr. Burns) and Victor
17
(...continued)
MidCoast was a client of Ice Miller of which Mr. Thrapp was a partner, and Mr.
Thrapp was subject to certain ethical constraints with respect to the disclosure of
any client information.
- 16 -
[*16] Vernick (Mr. Vernick),18 of Katz, Sapper & Miller (Katz accounting firm),
an accounting firm, held a conference call with certain representatives of Mid-
Coast.
Neither the FFI stockholders nor Mr. Thrapp saw any need to, and did not,
press MidCoast’s representatives regarding the details of its acquisition methodol-
ogy, its tax strategy, and its asset recovery business, all of which they understood
were interrelated. Nor did the FFI stockholders or Mr. Thrapp see any need to, or
in fact, inquire through their respective contacts whether there were persons who
were not employed by MidCoast or by Ice Miller and who might be familiar with
MidCoast’s acquisition methodology, its tax strategy, and its asset recovery
business.19
On December 11, 2001, Mr. Fankhauser, Mr. Weintraut, and Ms. Fank-
hauser executed an engagement letter (engagement letter dated December 11,
2001) in which they retained Ice Miller to represent FFI and them as stockholders
of FFI with respect to MidCoast’s proposal to purchase the FFI stock. The
18
Mr. Burns and Mr. Vernick died before the trial in these cases.
19
The record does not establish why Mr. Thrapp and the FFI stockholders
did not inquire through their respective contacts whether there were persons who
were not employed by MidCoast or by Ice Miller and who might be familiar with
MidCoast’s acquisition strategy, its tax strategy, and its asset recovery business.
- 17 -
[*17] engagement letter dated December 11, 2001, stated in pertinent part the
following with respect to the potential conflict of interest created by Ice Miller’s
representation of MidCoast that Ice Miller had concluded it needed to explain to
Mr. Fank-hauser, Mr. Weintraut, and Ms. Fankhauser:
MidCoast Conflict of Interest
While we have no direct conflict in this particular matter, i.e.,
we are not representing MidCoast, its affiliates or Other Parties in
connection with this Transaction [contemplated transactions involv-
ing FFI, the FFI stockholders, and MidCoast], we have represented
and currently represent MidCoast and/or its affiliates, and Other
Parties, in connection with other, unrelated matters. All confidential
information that we have obtained about MidCoast, its affiliates and
Other Parties as a result of these representations shall remain confi-
dential. These prior and existing relationships will not prevent Ice
Miller from zealously representing the interests of the Sellers [Mr.
Fankhauser, Mr. Weintraut, and Ms. Fankhauser] in connection with
the Transaction, but these relationships are ones that you deserve to
be aware of in connection with retaining us for this Transaction.
As attorneys in Indiana, we are obligated to bring to your
attention Rule 1.7 of the Rules of Professional Conduct applicable to
attorneys in Indiana. Rule 1.7 provides, in pertinent part, as follows:
(a) A lawyer shall not represent a client if the repre-
sentation of that client will be directly adverse to another
client, unless:
(1) the lawyer reasonably believes the representation
will not adversely affect the relationship with the other
client; and
(2) each client consents after consultation.
- 18 -
[*18] (b) A lawyer shall not represent a client if the repre-
sentation of that client may be materially limited by the
lawyer’s responsibilities to another client or to a third
person, or by the lawyer’s own interests, unless:
(1) the lawyer reasonably believes the representation
will not be adversely affected; and
(2) the client consents after consultation.
Based upon the information which has been provided to us, we
do not believe that our representation of the Sellers in connection
with the Transaction will (a) adversely affect the relationship with
MidCoast, (b) be adversely affected by our relationship with Mid-
Coast and/or its affiliates, or any of the Other Parties. Likewise, we
do not believe our relationship with MidCoast would materially limit
our ability to represent the Sellers and FFI. However, we do think
that it is prudent to request your written acknowledgment of our
relationship with MidCoast and consent to our representation of the
Sellers in connection with the Transaction in light of these circum-
stances. Your execution of this letter will constitute such a formal
consent and waiver of any such actual or potential conflicts of
interest.
On December 11, 2001, Olga Parra (Ms. Parra) signed, as the executive vice
president of MidCoast, a consent and waiver of conflict of interest on behalf of
MidCoast.20 Ms. Parra also was the general counsel of MidCoast.
Also on December 11, 2001, Mr. Bernstein sent to Mr. Fankhauser, Mr.
Weintraut, and Ms. Fankhauser on behalf of MidCoast a nonbinding letter of
20
The record does not establish whether any of the FFI stockholders
executed the engagement letter, but we presume that all of them did so.
- 19 -
[*19] intent (letter of intent) with respect to a proposed acquisition of their FFI
stock by MidCoast that required FFI to redeem as part of that acquisition 75 per-
cent of its stock from its stockholders. The letter of intent21 stated in pertinent
part:
Dear Shareholder(s) [Mr. Weintraut, Mr. Fankhauser, Ms. Fank-
hauser]:
We have received and reviewed certain material regarding ffi Corpo-
ration, an Indiana corporation (the “Company”) that you have pro-
vided to us. This letter of intent (“Letter”) is to set forth the basic
terms pursuant to which MidCoast Credit Corp. and/or its designee
(the “Share Buyer”)[22] shall acquire all of the remaining issued and
outstanding shares of the Company (the “Shares”) from its sharehold-
ers (the “Shareholders”) pursuant to a stock purchase transaction (the
“Proposed Share Transaction”) to occur immediately after or simulta-
neously with the redemption by the Company of approximately
seventy five percent (75%) of the Shares from the Shareholders in
consideration for (i) an assignment of receivables relating to a prom-
issory note [Elmwood Avenue LLC note], including accrued interest,
in the approximate amount of nine hundred twenty nine thousand
dollars ($929,000), (ii) an amount equal to the estimated refund of
21
When referring to the letter of intent, the share purchase and redemption
agreement (discussed below), the transactions described in those documents, and
any other agreement or document associated therewith or related thereto, our use
of terms such as “sale”, “purchase”, “redemption”, “loan”, and similar terms is for
convenience only. Our use of any such terms is not intended to imply, and does
not imply, that any of those transactions was a sale, purchase, redemption, loan, or
similar transaction for Federal income tax purposes.
22
As discussed below, MidCoast designated FFI Acquisition, a limited
liability company, to serve as the “Share buyer” in the “Proposed Share Trans-
action” discussed in the letter of intent.
- 20 -
[*20] Indiana corporate income tax payments made by the company for its
2001 tax year in the approximate amount of one hundred fifty
thousand dollars ($150,000), (iii) an assignment of the right to receive
a refund of the estimated federal corporate income tax payments made
by the Company for its 2001 tax year in the approximate amount of
six hundred thirty six thousand dollars ($636,000),[23] and (iv) the
transfer by the Company to the Shareholders of certain Oxidation
Technology related assets and other scheduled non-cash assets of the
Company (the “Redemption Price”) (the “Proposed Share Redemp-
tion”).
This Letter is intended to provide a framework for us to utilize as we
negotiate the terms and conditions of a definitive share purchase and
redemption agreement (“Definitive Agreement”) pursuant to which
the Proposed Share Transaction and the Proposed Share Redemption
(collectively, the “Transaction”) would be consummated. Accord-
ingly, this Letter does not constitute a legally binding or enforceable
agreement or commitment on the part of the parties to negotiate or
proceed with or toward the Transaction, nor does it purport to set
forth a complete statement of the terms and conditions of the Transac-
tion; provided, however, that in consideration of the time and costs
incurred and to be incurred in proceeding towards a possible Transac-
tion, the provisions in numbered paragraphs 1.3, 1.4, 1.5, 1.6 and 1.7
below (the “Binding Provisions”) shall be legally binding upon the
execution and acceptance of this Letter by those parties.
The Share Buyer contemplates that the basic terms and conditions of
the Proposed Share Transaction shall be as follows:
Section 1.1 Share Purchase Price. The Share Buyer shall
purchase the Shares at the closing of the Proposed Share Transaction
(the “Share Closing”) for a purchase price (the “Share Purchase
Price”) equal to the amount of the Company’s cash as of the Share
Closing less forty nine (49%) of the Company’s combined state and
23
The letter of intent erroneously stated that the FFI Federal 2001 income
tax payments totaled $636,000. The correct total is $628,592.
- 21 -
[*21] federal corporate income tax liability (taking into account any net
operating loss carryforwards) attributable to the Company’s business
operations and any sale, conveyance and/or transfer of its assets
during its 2001 tax year without taking into account any estimated tax
payment made by the Company with respect to such taxes (the
“Deferred Tax Liability”).
The Share Purchase Price shall be reduced by an amount equal to any
Liabilities remaining as of the Share Closing. “Liabilities” shall
include all specifically scheduled Liabilities of the Company, other
than the Deferred Tax Liability and any liability attributable to rea-
sonable and customary professional fees incurred in connection with
the Proposed Share Transaction not to exceed twenty thousand dollars
($20,000), which will not be borne by the Shareholders. If the Trans-
action does not close, the Shareholders will be responsible for the
payment of their professional fees. The parties expressly acknowl-
edge that to the extent that the parties fail to reach agreement on the
number and amount of the Liabilities to be scheduled, the Transaction
will not proceed.
Section 1.2. Conditions Precedent. The following shall be
conditions precedent to the Share Closing:
(a) The Share Buyer’s completion of due diligence to
its satisfaction, as provided in Section 1.6 below,
by the expiration of the Due Diligence Period (as
such term is defined in Section 1.6 below);
(b) The execution by the Share Buyer and the
Shareholders of a Definitive Agreement, with such
terms and conditions as shall be satisfactory to the
Share Buyer and the Shareholders, in their sole
discretion, by December 20, 2001;
(c) No adverse changes to the business or financial
condition of the Company between the date of this
Letter and the Share Closing;
- 22 -
[*22] (d) No breach of warranty, representation or covenant
contained in the Definitive Agreement as of the
Share Closing;
(e) Consummation of the Proposed Share Redemption
immediately prior to or simultaneously with the
Proposed Share Closing;
(f) The occurrence of the Share Closing by December
20, 2001.
* * * * * * *
Section 1.6 Access to Information. The Shareholders shall
provide representatives of the Share Buyer with access to the books,
records, properties, and other relevant information of the Company.
The Share Buyer shall complete its examination of the Company at
the Share Buyer’s expense by the Share Closing (the “Due Diligence
Period”). The Shareholders and their respective agents and represen-
tatives shall cooperate with the Share Buyer and the Share Buyer and
the Share Buyer’s agents and representatives in their due diligence
examination and shall provide the Share Buyer’s agents and represen-
tatives with access to the Company’s books, records, properties,
employees agents and representatives at such reasonable times and
places as the Share Buyer and the Shareholders shall reasonably
agree. If the Share Buyer elects not to proceed with the Proposed
Share Transaction for any reason, it shall so notify the Shareholders
in writing prior to the expiration of the Due Diligence Period.
* * * * * * *
Section 1.8 Definitive Share Agreement. The parties to this
Letter acknowledge and agree that the Shareholders shall be required,
in the event the Shareholders elect to execute a Definitive Agreement,
to make certain representations, warranties and covenants relative to
certain matters in the Definitive Agreement. Those matters are as
follows:
- 23 -
[*23] (a) Each of the Shareholder’ (if other than natural
persons) and the Company’s valid organization
and good standing and the sufficient authority and
capacity to execute, deliver and perform the Share
Agreement and consummate the Proposed Share
Transaction;
(b) The enforceability and binding effect of the Share
Agreement in accordance with its terms;
(c) The Shareholders’ title to and ownership of the
Shares free and clear of any liens, charges or other
encumbrances;
(d) The due and valid issuance of the Shares;
(e) The capital structure of the Company, including a
representation to the effect that the Shares pur-
chased by the Share Buyer constitute one hundred
percent (100%) of all of the issued and outstand-
ing capital stock of the Company;
(f) The lack of any options, warrants, rights of first
refusal, preemptive rights or similar rights or obli-
gations with respect to the Shares and any autho-
rized, but unissued shares of the Company;
(g) The absence of any law, rule, order, document or
agreement that would prohibit or be in conflict
with any of the Shareholders’ or the Company’s
execution of the Share Agreement or the consum-
mation of the Proposed Share Transaction;
(h) Except as specifically scheduled by the Sharehold-
ers, the absence of any litigation and liabilities,
including but not limited to any pending or
threatened environmental litigation or liabilities
relating to any of the Company’s assets;
- 24 -
[*24] (i) The amount of the tax basis in the Company’s
assets giving rise to the Deferred Tax Liability;
(j) The payment of all taxes of the Company (other
than the Deferred Tax Liability), filing of all tax
returns and related tax issues;
(k) The accuracy of the Company’s financial state-
ments; and
(l) Any other warranties, representations, and cove-
nants that is customary and reasonable with re-
spect to transactions of the same nature as the
Proposed Share Transaction.
The Share Buyer shall warrant, represent and covenant that it shall
cause the Company to pay the Deferred Tax Liability to the extent
that the Deferred Tax Liability is due given the Company’s post-
closing business activities and shall file all federal and state income
tax returns on a timely basis related thereto.
Section 1.9 Indemnification. In addition, subject to a
negotiated cap (which the parties believe to be approximately
$2,300,000) and survival period (which the parties believe will be 2
years for all claims other than those claims related to tax Liabilities,
which will survive for the applicable statute of limitations period)
which will attempt to mirror the liability the Shareholders would be
exposed to upon the dissolution and winding up of the Company, the
Shareholders shall indemnify the Company and the Share Buyer and
their respective officers, directors, shareholders, employees or
representatives against any loss, claim, damage or expense, including
attorneys’ fees and costs, which any one or more of them incur as a
result of an alleged or actual (i) act or omission of the Company or
the Shareholders occurring prior to the Share Closing, or (ii) breach
of any warranty, representation or covenant given or made by the
Company or the Shareholders with respect to the Company or its
assets prior to the Share Closing.
- 25 -
[*25] Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser (through Mr. Fank-
hauser) knew, directly or through Mr. Thrapp, that the transactions that MidCoast
had proposed in the letter of intent would result in their receiving a greater amount
of assets--a so-called premium--than they would receive if FFI were to liquidate
and dissolve24 and the Federal and State income tax liabilities that FFI had in-
curred as a result of the FFI 2001 asset sales were to be paid in full. That is why
on December 12, 2001, the day after MidCoast had sent FFI and the FFI
stockholders the letter of intent, Mr. Weintraut on behalf of FFI and the FFI
stockholders signed and accepted the terms of that letter. On the same date, Mr.
Bernstein signed and accepted those terms on behalf of MidCoast.
At no time before or after signing the letter or before the closing of the
transactions to which FFI, the FFI stockholders, and MidCoast agreed in the share
purchase and redemption agreement (discussed below) did Mr. Thrapp or Kyle
Hupfer (Mr. Hupfer )25 with Ice Miller or Mr. Burns or Mr. Vernick26 with the
24
FFI and the FFI stockholders had previously taken formal actions to effect
the liquidation and the dissolution of FFI.
25
Mr. Hupfer, who at all relevant times was an associate with Ice Miller and
who performed certain nontax work for FFI and the FFI stockholders relating to
the MidCoast proposed transactions, was not a tax professional. Consequently, he
was not qualified to, and did not, provide any Federal income tax advice to Mr.
Fankhauser, Mr. Weintraut, and Ms. Fankhauser or to FFI with respect to the
(continued...)
- 26 -
[*26] Katz accounting firm inform FFI and the FFI stockholders about possible tax
problems associated with those transactions. Nor did Mr. Thrapp, Mr. Hupfer, Mr.
Burns, or Mr. Vernick recommend to FFI and to the FFI stockholders that they
retain a tax professional to provide advice with respect to the transactions that
MidCoast had proposed in the letter of intent or to which they thereafter agreed in
the share purchase and redemption agreement. FFI and the FFI stockholders did
not retain any tax professional to provide advice with respect to those transactions,
even though FFI had retained tax professionals over the years to provide it with
tax advice with respect to certain matters.
After the various parties accepted the letter of intent, Mr. Thrapp was
responsible for negotiating in large part the agreement among those parties
regarding the transactions that MidCoast had proposed in that letter.27 Mr. Wein-
25
(...continued)
transactions which MidCoast had proposed in the letter of intent or to which they
agreed in the share purchase and redemption agreement. (We shall sometimes
refer collectively to Mr. Thrapp and Mr. Hupfer as petitioners’ attorneys.)
26
The record does not establish that Mr. Burns or Mr. Vernick was a tax
professional.
27
It was Mr. Thrapp who negotiated with MidCoast and was able to obtain
its agreement to pay the attorneys’ fees (up to a stated limit) that Mr. Fankhauser,
Mr. Weintraut, and Ms. Fankhauser were to incur in connection with implement-
ing MidCoast’s proposed transactions.
- 27 -
[*27] traut, however, negotiated directly with certain of MidCoast’s represent-
atives the percentage of FFI’s 2001 Federal and State income tax liabilities that
MidCoast was to pay to purchase the stock of the FFI stockholders. In doing so,
Mr. Weintraut attempted to have MidCoast agree to pay a percentage that was at
the high end of the range of percentages to which he understood MidCoast had
agreed in the past as part of its acquisition methodology.
The FFI stockholders did not personally undertake any due diligence efforts
(due diligence) on behalf of FFI or themselves with respect to the transactions that
MidCoast had proposed in the letter of intent. Instead, the FFI stockholders relied
on Mr. Thrapp to conduct due diligence with respect to those transactions.
Mr. Thrapp spent some time performing a limited amount of due diligence
on behalf of FFI, Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser with re-
spect to the transactions that MidCoast had proposed in the letter of intent. At a
time not established by the record, Mr. Thrapp reviewed certain promotional
materials that MidCoast had prepared in which MidCoast represented that it had
been in business since 1958 and had been in the asset recovery business since
1996. In those promotional materials, MidCoast indicated that it acquired corpo-
rations for use in connection with its asset recovery business and continued to
operate those corporations after it acquired them. MidCoast also indicated in
- 28 -
[*28] those promotional materials that it caused the corporations that it acquired to
satisfy their respective tax liabilities as well as other liabilities. Mr. Thrapp did
not perform due diligence with respect to FFI Acquisition, the entity that Mr.
Bernstein formed and that MidCoast designated to serve as the purchaser of the
stock of the FFI stockholders (discussed in more detail below).
Mr. Thrapp claimed to have believed that the limited amount of due dili-
gence that he performed was adequate taking into account the information and the
circumstances with respect to the transactions that MidCoast had proposed in the
letter of intent and the signatories to that letter about which he had knowledge or
an understanding. Mr. Thrapp further claimed to have believed that the knowl-
edge and the understanding that he had with respect to the transactions that Mid-
Coast had proposed in the letter of intent and the signatories to that letter enabled
him to determine and to assess the risks that he concluded those transactions posed
to his clients, FFI and the FFI stockholders. Mr. Thrapp claimed to have held
those beliefs even though (1) he did not know any of the details of MidCoast’s
acquisition methodology, its tax strategy, or its asset recovery business; (2) he was
not a tax professional and thus was not qualified to know of, or be sensitive to, any
tax risks associated with the transactions which MidCoast had proposed or to
which FFI and the FFI stockholders agreed in the share purchase and redemption
- 29 -
[*29] agreement; and (3) he knew (as discussed below) that the funds that were to
be provided to MidCoast in order to effect the acquisition of the FFI stock were to
be returned as of the closing of that transaction to the provider of those funds.
Following the execution of the letter of intent, MidCoast began performing
due diligence with respect to FFI in anticipation that the signatories to that letter
would agree to undertake the transactions that MidCoast had proposed in that
letter and that the closing date of those transactions would be December 20, 2001.
Mr. Weintraut assisted MidCoast’s controller, Carolyn Sesco (Ms. Sesco), and
MidCoast’s independent accountant, Scott Elkins, with respect to that due dili-
gence. Mr. Weintraut spent several days in providing that assistance.
On December 14, 2001, FFI sent by facsimile to Mr. Hupfer preliminary
financial computations (FFI’s preliminary financial computations) that Mr. Wein-
traut had prepared by using FFI’s financial records. According to FFI’s prelimi-
nary financial computations, FFI had for its taxable year 2001 a projected Federal
income tax liability of $801,749 and a projected State income tax liability of
$225,030.
The FFI stockholders and the FFI directors entered into a joint consent
dated December 15, 2001, to revoke FFI’s December 19, 2000 plan of liquidation.
- 30 -
[*30] On December 17, 2001, FFI organized FFW Holdings, LLC (FFW), under
the laws of the State of Indiana. FFW, whose sole member was FFI, was a dis-
regarded entity for Federal tax purposes. FFI formed FFW to serve, inter alia, as a
vehicle to transfer to the FFI stockholders certain of FFI’s cash and noncash assets
and all of its liabilities except its Federal and State 2001 income tax liabilities in
exchange for 75 percent of the outstanding stock of FFI that they owned. On
December 19, 2001, Mr. Weintraut, as executive vice president of FFI, signed
FFW’s operating agreement.
Around December 18, 2001, Mr. Weintraut prepared a balance sheet for FFI
(December 18, 2001 balance sheet) that reflected its assets and its liabilities as of
that date on the assumption that the transactions proposed in the letter of intent
were to occur. According to the December 18, 2001 balance sheet, FFI was to
have the following assets and the following Federal income tax liability and State
income tax liability for its taxable year 2001 after it distributed membership in-
terests in FFW to Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser in ex-
- 31 -
[*31] change for 75 percent of the FFI stock that they owned:28 (1) cash of
$875,855.49, (2) the right to a refund of the FFI State 2001 income tax payments
of $157,700, (3) an anticipated Federal income tax liability (anticipated 2001
Federal income tax liability) for FFI’s taxable year 2001 of $794,949.13, and (4)
an anticipated State income tax liability (anticipated 2001 State income tax lia-
28
The December 18, 2001 balance sheet did not show as an asset of FFI the
balance of $11,955.46 in a certain bank account in the name of FFI (FFI’s bank
account balance of $11,955.46). Nor did that balance sheet show as a liability of
FFI certain outstanding checks of $11,955.46 issued by FFI (FFI’s outstanding
checks of $11,955.46). Because FFI’s bank account balance of $11,955.46 and
FFI’s outstanding checks of $11,955.46 were in the same amounts, they offset
each other and had no effect on the share purchase price (discussed below)
calculated in the December 18, 2001 balance sheet. Consequently, for conve-
nience, we shall not refer, except infrequently, to FFI’s bank account balance of
$11,955.46 as an asset of FFI or to FFI’s outstanding checks of $11,955.46 as a
liability of FFI when we discuss the transactions and the events that are relevant to
the issues presented here.
In addition, the December 18, 2001 balance sheet did not show as an asset
of FFI a receivable of $43,926.57 (discussed below) from the Prudential Life
Insurance Co. of America (Prudential), which FFI had never claimed, which the
State of Indiana was holding in the name of FFI, and of which no one associated
with FFI or MidCoast was aware at the time MidCoast proposed the transactions
in the letter of intent and at the time the transactions closed pursuant to the share
purchase and redemption agreement of FFI, the FFI stockholders, and MidCoast.
As a result, the receivable from Prudential of $43,926.57 (Prudential demutual-
ization funds receivable of $43,926.57) had no effect on the share purchase price
calculated in the December 18, 2001 balance sheet. Consequently, for conve-
nience, we shall not refer, except infrequently, to the Prudential demutualization
funds receivable of $43,926.57 as an asset of FFI when we discuss the transactions
and the events that are relevant to the issues presented here.
- 32 -
[*32] bility) for FFI’s taxable year 2001 of $231,151.56.29 (We shall sometimes
refer collectively to the total (i.e., $1,026,100.69) of FFI’s anticipated 2001 Fed-
eral income tax liability and anticipated 2001 State income tax liability that were
shown in the December 18, 2001 balance sheet as FFI’s total anticipated 2001 tax
liability.)
Pursuant to a formula set forth in the December 18, 2001 balance sheet, the
stock purchase price for the stock of FFI that MidCoast was to purchase from the
FFI stockholders was to be determined, as shown in certain computations in that
balance sheet, by reducing FFI’s total assets (i.e., $1,033,555.49) consisting of
cash of $875,855.49 and the right to a refund of the FFI State 2001 income tax
payments of $157,700, which FFI would be considered to own upon effecting the
redemption transaction that MidCoast had proposed in the letter of intent, by 49
percent (i.e., by $502,789.34) of FFI’s total anticipated 2001 tax liability of
29
As noted, Mr. Weintraut made the underlying computations of FFI’s
anticipated 2001 Federal income tax liability and its anticipated 2001 State income
tax liability shown in the December 18, 2001 balance sheet. Those liabilities
totaled $1,026,100.69, which is different from the total (i.e., $1,026,779) of FFI’s
projected Federal income tax liability of $801,749 and its projected State income
tax liability of $225,030 for its taxable year 2001 that were shown in FFI’s
preliminary financial computations that he also prepared. The record does not
establish the reason for that difference.
- 33 -
[*33] $1,026,100.69. The balance of $530,766.15 was to be the purchase price for
the FFI stock that MidCoast was to purchase from the FFI stockholders.
On December 18, 2001, Prudential entered into a demutualization transac-
tion whereby it converted from a mutual insurance company to a stock insurance
company. FFI was a policyholder at the time of that demutualization transaction
and, as such, was entitled to receive certain shares of Prudential stock and a cer-
tain amount of Prudential’s cash. Because FFI did not make a claim to Prudential
for the stock and the cash to which it was entitled as a result of Prudential’s
demutualization, Prudential paid $43,926.57 to the Indiana Attorney General’s
office.30
On December 19, 2001, immediately before the contribution of certain of its
assets to FFW, FFI had the following assets and liabilities:
30
See supra note 28.
- 34 -
[*34] Assets Amounts
Cash $1,045,510.95
Elmwood Avenue LLC note 913,895.43
Real estate in Thief Falls, Minnesota (1)
Cash in escrow from FFI asset sale 197,131.52
Oxidation technology (2)
Refundable utility deposit 1,153.54
Interest receivable on Elmwood Avenue LLC note 19,387.87
Insurance premium refund 2,696.00
Total 2,179,775.31
Liabilities Amounts
Accounts payable to ADP $81.00
Accounts payable to Ronald Cook 620.32
Accounts payable to Citizens Insurance 10,000.00
Accounts payable to Ice Miller 32,454.03
Payments due to retirees 25,684.08
Refunds due dealers 1,046.47
GSI warranty claim adjustment 9,608.09
Accrued property taxes 33,144.21
Contingent payable to Hanover Insurance 10,000.00
Unpaid 2001 anticipated Federal income tax liability3 166,357.13
Unpaid 2001 anticipated State income tax liability4 73,451.56
Total 362,446.89
Excess of assets over liabilities 1,817,328.42
1
The record does not establish the value of the real estate in Thief Falls, Minnesota.
2
3The record does not establish the value of the oxidation technology.
FFI had made payments totaling $628,592 with respect to its anticipated 2001 Federal
income tax liability of $794,949.13.
4
FFI had made payments totaling $157,700 with respect to its anticipated 2001 State
income tax liability of $231,151.56.
- 35 -
[*35] On December 18, 2001, in preparation for the transactions contemplated in
the letter of intent, Mr. Bernstein organized under the laws of the State of Indiana31
FFI Acquisition (FFIA), a limited liability company, to enter into those transac-
tions as MidCoast’s designee. According to FFIA’s operating agreement, Mr.
Bernstein was required to contribute $1,000 in return for his interest as FFIA’s
sole member.32
31
The parties stipulated that FFI Acquisition was organized under the laws
of the State of Indiana as an Indiana limited liability company. In the share
purchase and redemption agreement that FFI Acquisition, FFI, Mr. Fankhauser,
Mr. Weintraut, and Ms. Fankhauser executed, FFI Acquisition represented and
warranted in section 3.2 that “purchaser [FFI Acquisition] is duly organized and
validly existing under the laws of the State of Florida.” In the preamble of that
same agreement, FFI Acquisition is described as an “Indiana Limited Liability
Company”. MidCoast apparently followed virtually the same or a very similar
pattern when it agreed to buy at a so-called premium stock of a C corporation that
held cash resulting from the sale of operating assets and that had Federal and State
income liabilities attributable to those sales. Consequently, MidCoast most likely
had a cookie-cutter type agreement that it used in order to effect the purchase of
the C corporation stock in the instant cases and in other cases with virtually
identical or very similar fact patterns. That would explain, but not justify or
excuse, the inconsistencies between (1) the stipulation of facts in these cases and
the preamble of the stock purchase and redemption agreement and (2) section 3.2
of that agreement.
32
The record does not establish that Mr. Bernstein contributed $1,000 to
FFIA in return for his interest as its sole member. Nor does the record establish
that FFIA had any assets as of the closing of the transactions, which MidCoast had
proposed in the letter of intent or to which FFI, the FFI stockholders, and FFIA
agreed in the share purchase and redemption agreement, or that it had any assets
after that closing other than the stock of FFI.
- 36 -
[*36] On December 19, 2001, FFI contributed the following assets and liabilities33
to FFW:
Assets Amounts
Cash $157,700.00
Elmwood Avenue LLC note 913,895.43
Right to refund of FFI Federal 2001 income tax payments 628,592.00
Real estate in Thief Falls, Minnesota (1)
Cash in escrow from FFI asset sale 197,131.52
Oxidation technology (2)
Refundable utility deposit 1,153.54
Interest receivable on Elmwood Avenue LLC note 19,387.87
Insurance premium refund 2,696.00
Assets total 1,920,556.36
Liabilities Amounts
Accounts payable to ADP $81.00
Accounts payable to Ronald Cook 620.32
Accounts payable to Citizens Insurance 10,000.00
Accounts payable to Ice Miller 32,454.03
Payments due to retirees 25,684.08
Refunds due dealers 1,046.47
GSI warranty claim adjustment 9,608.09
Accrued property taxes 33,144.21
Contingent payable to Hanover Insurance 10,000.00
Liability total 122,638.20
Excess of assets over liabilities 1,797,918.16
1
The record does not establish the value of the real estate in Thief Falls, Minnesota, that
FFI contributed to FFW.
2
The record does not establish the value of the oxidation technology that FFI contributed
to FFW.
33
The assets and the liabilities shown assume that the transactions proposed
in the letter of intent were to occur.
- 37 -
[*37] On December 20, 2001, Stephen J. Shapiro (Mr. Shapiro) executed a
certificate on behalf of FFIA, which included resolutions of Mr. Bernstein dated
December 19, 2001. Those resolutions provided that FFIA, as the designee of
MidCoast, was to enter into the share purchase and redemption agreement with
FFI and the FFI stockholders.
On December 20, 2001, FFIA, FFI, and the FFI stockholders entered into a
share purchase and redemption agreement (SPRA), the terms of which were sim-
ilar but not identical to the terms that MidCoast had proposed in the letter of in-
tent. Mr. Bernstein signed the SPRA on behalf of FFIA; Mr. Weintraut signed it
on behalf of FFI; and Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser signed
it as the FFI stockholders.
The only reason that FFI and the FFI stockholders accepted MidCoast’s
letter of intent and thereafter decided to, and did, enter into the SPRA with Mid-
Coast and the related agreements (discussed below) was that those stockholders
wanted to, and MidCoast agreed that they would, receive a substantially greater
amount--a so-called premium--from the transactions which MidCoast proposed to
them or to which they agreed in the SPRA than they would receive from the
liquidation of FFI after FFI’s total anticipated 2001 tax liability of $1,026,100.69,
which was attributable to the FFI 2001 asset sales, was paid (posttax liquidation
- 38 -
[*38] value). When they accepted MidCoast’s letter of intent and thereafter
entered into the SPRA with MidCoast and the related agreements (discussed
below), Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser knew, as did Mr.
Thrapp, that the only reason that the FFI stockholders would be able to receive
such a premium was that that total anticipated 2001 tax liability would not be paid.
In other words, Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser knew, as did
Mr. Thrapp, that if and only if FFI’s total anticipated 2001 tax liability was not
paid would the FFI stockholders receive the so-called premium.34
34
The respective amounts of the Federal income tax liability and the State
income tax liability of FFI for its taxable year 2001 that were attributable to the
FFI 2001 asset sales were estimated to be $794,949.13 and $231,151.56,
respectively. As discussed below, under the SPRA, the stockholders of FFI were
to retain as of the closing of the transactions under the SPRA, through their
respective ownership interests in FFW that FFI was to distribute to them in the so-
called redemption transaction under the SPRA, the right to a refund of the FFI
Federal 2001 income tax payments of $628,592. FFI, as FFIA’s designee, was to
retain as of the closing of the transactions under the SPRA the right to a refund of
the FFI State 2001 income tax payments of $157,700. Because of those antici-
pated refunds of those respective income tax payments, Mr. Fankhauser, Mr.
Weintraut, and Ms. Fankhauser knew that none of FFI’s total anticipated 2001 tax
liability of $1,026,100.69 would be paid, thereby enabling them to receive a
substantially greater amount, a so-called premium, from the transactions MidCoast
proposed to them than they would receive from the liquidation of FFI after FFI’s
total anticipated 2001 tax liability of $1,026,100.69 was paid in full.
- 39 -
[*39] Immediately before the closing of the SPRA on December 20, 2001, FFI
had the following assets and liabilities35
Assets Value
Membership interest in FFW1 $1,920,556.36
Cash 875,855.49
Right to refund of FFI State 2001 income tax
payments 157,700.00
Asset total 2,954,111.85
Liabilities Value
Liabilities held by FFW $122,638.20
Anticipated Federal 2001 income tax liability 794,949.13
Anticipated 2001 State income tax liability 231,151.56
Liabilities Total 1,148,738.89
Excess of assets over liabilities 1,805,372.96
1
FFW held the right to a refund of the FFI Federal 2001 income tax
payments totaling $628,592.
The SPRA provided in pertinent part:
This Share Purchase and Redemption Agreement (“Agree-
ment”) is made and entered into on December 20, 2001, by and
among FFI Acquisition, LLC, an Indiana limited liability company
(“Purchaser”), ffi Corporation (formerly Farm Fans, Inc.), an Indiana
corporation (the “Company”) and Curtis D. Fankhauser, Cynthia A.
Fankhauser, and Thomas L. Weintraut, the shareholders of the
Company (each a “Seller,” and collectively the “Sellers”).
35
The assets and the liabilities shown assume that the transactions to which
the parties to the SPRA agreed were to occur.
- 40 -
[*40] WHEREAS, the Sellers own all of the issued and outstanding
common shares of the Company (the “Common Shares”);
WHEREAS, the Company has previously sold substantially all
of the assets of the Company pursuant to those certain documents,
instruments and agreements dated primarily as of January 2, 2001,
and October 12, 2001 by and between the Company and The GSI
Group, Inc. (the “Asset Purchaser”) and 5900 Elmwood Avenue, LLC
and its predecessors and assigns (the “Real Estate Purchaser”) (all of
the documents, instruments and agreements entered into by the parties
in connection with these transactions are listed on Schedule 1.0 and
are hereinafter collectively referred to as the “Asset Purchase Agree-
ments”); and
WHEREAS, the Company contributed cash and certain non-
cash assets to FFW Holdings, LLC, a newly formed Indiana limited
liability company (“Newco, LLC”), and FFW Holdings, LLC as-
sumed only certain specific liabilities of the Company (the “Assumed
Liabilities”) pursuant to a Contribution Agreement dated December
19, 2001 (the “Contribution Agreement”), in exchange for all of the
membership interests of Newco, LLC; and
* * * * * * *
NOW, THEREFORE, in consideration of the premises and the
mutual promises herein made and in further consideration of the re-
presentations, warranties and covenants contained herein, the parties
agree as follows:
ARTICLE I.
PURCHASE AND SALE OF SHARES
Section 1.1. Sale and Purchase of Shares.
(a) At the Closing [which is deemed effective at 11:59
p.m. on December 20, 2001], subject to the terms
- 41 -
[*41] and conditions of this Agreement, the Company
shall purchase the Redemption Shares from Sellers
and the Sellers shall sell, assign and deliver the
Redemption Shares to the Company, free and clear
of all liens, claims, encumbrances, security inter-
ests and similar interests of any kind or nature
whatsoever (the “Redemption”).
(b) At the Closing, subject to the terms and conditions
of this Agreement, the Purchaser shall purchase
the Purchase Shares from Sellers, and the Sellers
shall sell, assign and deliver the Purchase Shares
to the Purchaser, free and clear of all liens, claims,
encumbrances, security interests and other inter-
ests of any kind or nature whatsoever.
The number of Shares being purchased by the Company, and
the number of Shares being purchased by the Purchaser shall be as set
forth on Schedule 1.1.
Section 1.2. Purchase Price. The aggregate
purchase price for the Shares (the “Purchase Price”) shall
be equal to the sum of the Redemption Value plus the
Purchase Payment, and shall be paid by the Company
with respect to its purchase of the Redemption Shares,
and by the Purchaser with respect to its purchase of the
Purchase Shares, as follows:
(a) At the Closing, the Company shall deliver to
Sellers all of the membership interests of Newco,
LLC (the “Redemption Payment,” or the
“Redemption Value”). The assets and liabilities of
Newco, LLC at that time shall consist solely of
those listed on Schedule 1.2(a).
(b) At the Closing, the Purchaser shall deliver to the
Sellers in cash via wire transfer of immediately
- 42 -
[*42] available funds an amount equal to $530,766.15[36]
in proportion to their ownership interests of the
Company (the “Purchase Payment”).[37]
Section 1.3. Closing. The purchase and sale of the Shares
pursuant to this Agreement (the “Closing”) shall take place at the
offices of Ice Miller, One American Square, Indianapolis, Indiana at
9:00 a.m. on December 20, 2001, or at such other time and place as
the Sellers and the Purchaser mutually agree (which date is desig-
nated the “Closing Date”). For purposes of this Agreement, the
Closing shall be deemed effective as of 11:59 p.m. on the Closing
Date (the “Effective Time”).
ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF THE SELLERS
As an inducement to enter into this Agreement, the Sellers
hereby jointly and severally represent and warrant to the Purchaser as
follows:
* * * * * * *
Section 2.10. Retained Assets. Immediately following the
Closing hereunder, the Company’s assets will consist only of (i) cash
in an amount not less than $875,855.49, (ii) $11,955.46 which shall
be in the bank account #0099990437 with Fifth Third Bank to satisfy
36
The amount of the “Purchase Payment” in the SPRA was the amount of
the “Stock Purchase Price” shown in the December 18, 2001 balance sheet.
37
As discussed below, although the FFI stockholders were deemed to have
been paid for their respective stockholdings in FFI “in cash via wire transfer of
immediately available funds”, their respective portions of the so-called purchase
payment for those holdings were placed into an escrow account and were not in
fact distributed to them by wire transfer until December 21, 2001, the day after the
closing.
- 43 -
[*43] outstanding checks (the “Bank Account”) and (iii) a right to receive a
refund of $152,000 from the State of Indiana, and $5,700 from other
states, for 2001 income taxes which were prepaid in 2001 (the “State
Tax Refund”), which shall be free and clear of all liens, claims and
encumbrances of any nature whatsoever.[38]
* * * * * * *
Section 2.13. Tax and Other Returns and Reports. All
federal, state, local and foreign tax returns, reports, statements and
other similar filings required to be filed by the Company or any
Subsidiary including, without limitation, the federal and state income
tax returns for the Company’s and each Subsidiary’s fiscal year ended
December 31, 2000, (collectively the “Tax Returns”) with respect to
any federal, state, local or foreign taxes, assessments, interest, penal-
ties, deficiencies, fees and other governmental charges or imposition,
(including, without limitation, all income tax, unemployment com-
pensation, social security, payroll, sales and use , excise, privilege,
property, ad valorem, franchise, license, school and any other tax or
similar governmental charge or imposition under the laws of the
United States or any state or municipal or political subdivision there-
of or any foreign country or political subdivision thereof) (the
“Taxes”), have been filed with the appropriate governmental agencies
in all jurisdictions in which such Tax Returns are required to be filed,
and all such Tax Returns properly reflect the liabilities of the Com-
pany and each Subsidiary for Taxes for the periods, property or
events covered thereby. All Taxes accrued since the end of the last
tax period or from the date which Tax Returns were last filed, includ-
ing, without limitation, those arising from the operations of the
Company or any Subsidiary up to the Closing, have been accurately
and properly determined and are set forth on Schedule 2.13 hereof
(“Current Taxes”). All Taxes, including, without limitation, the
38
The assets described in section 2.10 of the SPRA are the assets that were
shown in the December 18, 2001 balance sheet (except for FFI’s bank account
balance of $11,955.46 and FFI’s outstanding checks of $11,955.46, see supra note
28).
- 44 -
[*44] Current Taxes and those Taxes which are called for by the Tax Re-
turns, have been or will be paid on or before the Closing Date, other
than the Deferred Tax Liability. The Company and each Subsidiary
has made all deposits required by law to be made with respect to
employees’ withholding and other employment taxes, including,
without limitation, the portion of such deposits relating to taxes
imposed upon it. Neither the Company nor any Subsidiary has
received any notice of assessment or proposed assessment in connec-
tion with any Tax Returns, and there are not pending any tax exami-
nations of or tax claims asserted against the Company or any Subsid-
iary or any of their assets or properties. Neither the Company nor any
Subsidiary has extended, or waived the application of, any statute of
limitations of any jurisdiction regarding the assessment or collection
of any Taxes. There are no tax liens (other than any lien for current
taxes not yet due and payable set forth on Schedule 2.13 hereof) on
any of the assets or properties of the Company or any Subsidiary.
There is no basis for any additional assessment of any Taxes. The
Company has not filed any returns or other documents with the IRS
indicating that the Company would be dissolved or was dissolved or
that it would discontinuing business operations, except that the Com-
pany has filed a Form 966 with the Internal Revenue Service.
* * * * * * *
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser represents and warrants to each of the Sellers as
follows:
Section 3.1. Authorization of Purchaser. When executed
and delivered by the Purchaser, this Agreement will constitute the
valid and legally binding obligation of the Purchaser enforceable
against the Purchaser in accordance with its terms.
- 45 -
[*45] Section 3.2. Corporate Status of Purchaser. Purchaser is
duly organized and validly existing under the laws of the State of
Florida. Purchaser has all requisite legal and corporate power and
authority to own, lease and operate its properties and assets and to
carry on its business as now conducted and as proposed to be con-
ducted, and has all requisite legal and corporate power and authority
to enter into and execute this Agreement and the documents and
instruments related hereto.
Section 3.3. Consents. Purchaser is not required to obtain
any permit, consent, approval, order or authorization from, and is not
required to make any registration, qualification, designation, declara-
tion or filing with, any federal or state governmental authority or third
party in connection with the execution, delivery or performance of
this Agreement or the consummation of the transaction contemplated
hereby.
Section 3.4. Authorization. All actions on the part of
Purchaser necessary for the authorization, execution, delivery and
performance of this Agreement, and the consummation of the transac-
tions contemplated hereby and thereby, has been taken prior to the
Closing. This agreement has been duly executed and delivered by
Purchaser and constitutes a legal, valid and binding obligation of
Purchaser, enforceable against Purchaser in accordance with its terms
and conditions.
Section 3.5. Noncontravention. The execution, delivery and
performance of this Agreement by Purchaser does not and will not, in
any Material Respect, violate, conflict with or result in the breach of
any term, condition or provision of, or require the consent of any
other person under: (a) any existing law, ordinance, or governmental
rule or regulation to which Purchaser is subject; (b) any judgment,
order, writ, injunction, decree or award of any court, arbitrator or
governmental or regulatory official, body or authority which is appli-
cable to Purchaser; (c) the charter documents of Purchaser, or any
securities issued by Purchaser; or (d) any mortgage, indenture, agree-
ment, contract, commitment, lease, plan, authorization, or other
- 46 -
[*46] instrument, document or understanding, oral or written, to which
Purchaser is a party, by which Purchaser may have rights or by which
any of the assets of Purchaser may be bound or affected, or give any
party with rights thereunder the right to terminate, modify, accelerate
or otherwise change the existing rights or obligations Purchaser there-
under.
Section 3.6. Disclosure. Purchaser has not omitted to state to
the Sellers any material fact relating to Purchaser which is necessary
in order to make the representations or warranties of Purchaser con-
tained in this Article III not misleading or which if disclosed would
reasonably affect in any Material Respect the decision of a person
considering a sale of the Shares.
ARTICLE IV.
CONDITIONS OF PURCHASER’S OBLIGATIONS TO CLOSE
The obligations of the Purchaser under this Agreement are
subject to the fulfillment, at or before the Closing, of each of the
following conditions:
* * * * * * *
Section 4.7. Financial Condition and Redemption.
Immediately prior to the Closing, the Company shall possess assets
consisting solely of (i) the right to receive the State Tax Refund, (ii)
cash in an amount not less than $875,855.49, (iii) $11,955.46 which
shall be in the Bank Account, and (iv) the membership interests of
Newco, LLC, and the Company shall be subject to no Liabilities
except its obligations under the Contribution Agreement. The re-
demption by the Company of the Redemption Shares shall have been
closed to the satisfaction of the Purchaser.
* * * * * * *
- 47 -
[*47] ARTICLE VI.
COVENANTS
To the extent applicable, Sellers, Purchaser and the Company
further covenant and agree as follows:
* * * * * * *
Section 6.3. Full Access. Following the Closing, to the
extent necessary, the Sellers will permit representatives of the Pur-
chaser to have full access at all reasonable times to the books, records
(including tax records), contracts and documents of or pertaining to
the Company, any Subsidiary, or the Shares. To the extent the Pur-
chaser takes possession at Closing of any of the books or records of
the Company or any Subsidiary, the Purchaser shall provide the
Sellers, to the extent necessary, access at all reasonable times to such
books and records. Sellers will use their reasonable best efforts to
permit Purchaser or its representatives to have access to the books
and records of the Company that were transferred to the Asset Pur-
chaser and the Real Estate Purchaser upon request.
* * * * * * *
Section 6.7. Survival of Representations and Warranties
and Indemnification Obligations.
(a) The parties agree that the representations and
warranties of the Sellers under this agreement or in any
certificate, schedule, statement, document or installment
furnished hereunder, and the indemnification obligations
of the Sellers under this Agreement as more particularly
set forth in Article IX hereof, shall survive for a period
of two (2) years after the Closing Date, except that the
representations, warranties and obligations, and related
indemnification obligations for breach or nonperfor-
mance thereof, with respect to Taxes and Tax Returns
- 48 -
[*48] shall survive subject only to the applicable statute of
limitations periods, if any, and except that the Sellers’
obligation to indemnify, defend and hold harmless the
Purchaser, any Subsidiary, and the Company under this
Agreement with respect to claims against the Company
arising under the Asset Purchase Agreements shall sur-
vive for as long as the Company has any obligation to (i)
indemnify, defend or hold harmless (or is otherwise
determined to be liable to) any party under any of the
Asset Purchase Agreements arising under such agree-
ment, or (ii) preform any covenant or obligation under
any Asset Purchase Agreement. Additionally, the two
(2) year survival period shall not apply to Liabilities
arising out of Newco, LLC’s failure to satisfy the Liabili-
ties it specifically assumes under the Contribution
Agreement.
(b) The parties agree that the representations and
warranties of the Purchaser under this Agreement or in
any certificate, schedule, statement, document or instru-
ment furnished hereunder and the indemnification obli-
gations of the Purchaser under this Agreement as more
particularly set forth in Article IX hereof shall survive
for a period of two (2) years after the Closing Date.
* * * * * * *
Section 6.10. Taxes and Tax Filings. The Sellers agree, at
their sole cost and expense, to prepare, or cause to be prepared, all tax
returns, other that the state and federal income tax for the fiscal year
ending December 31, 2001, (the “Sellers Tax Returns”) that are due
to be filed after the Closing Date and that relate to any and all re-
quired taxable activities of the Company or any Subsidiary through
and including the Closing Date, and shall file all returns and pay all
taxes in connection therewith. On or before the tenth (10th) business
day before their due date, Sellers will submit to the Company copies
of all such Seller[s] Tax Returns. In addition to the preparation of the
- 49 -
[*49] Sellers’ Tax Returns, Sellers shall also prepare and submit to the
Company all Forms W2 and 1099 for the Company’s employees’ and
independent contractors during the period of Sellers’ ownership of
the Company. The Company shall assist the Sellers in this process if
required. The Sellers agree to assist the Company, upon its request,
in the preparation and filing of all future Tax Returns and in the
application for and procuring of all Tax refunds and agree[] to pro-
vide all documents required by the Company in order to verify or
substantiate the information in any Tax Return or application for a
Tax refund. The Purchaser shall cause the Company to prepare and
file the state and federal income tax returns for the fiscal year ending
December 31, 2001. The Company shall report on its federal and
state income tax returns all gains attributable to the receipt of the
proceeds from the Asset Purchaser and Real Estate Purchaser pursu-
ant to the allocation required by the Asset Purchase Agreements, and
shall pay the applicable tax authorities the Deferred Tax Liability, if
any, resulting from such gain in light of the other post-closing activi-
ties of the Company. The Sellers and Newco, LLC, jointly and
severally, (i) agree to repay to the Company an amount equal to the
difference between $157,700 and the actual amount of the State Tax
Refund actually received by the Company, if any, and (ii) provided
that the Company files its request for the State Tax Refund on or
before January 31, 2002, shall repay an amount equal to the full
amount of the State Tax Refund to the Company if it is not received
within one hundred twenty (120) days of the filing of the application
for refund; provided that neither Sellers nor Newco, LLC shall have
any liability to pay such a deficiency or refund if (y) it results from an
act or omission of the Company after the Closing, or (z) the Company
fails to completely satisfy the Deferred Tax Liability, if any, resulting
from such gain in light of the other post-closing activities of the Com-
pany. Additionally, if the Company has not received the State Tax
Refund within ninety (90) days of filing the application for refund,
the Company shall notify the Sellers and shall allow the Sellers to
pursue the State Tax Refund on its behalf and shall give Sellers all
commercially reasonable assistance in its efforts to collect such
refund[.]
- 50 -
[*50] * * * * * * *
ARTICLE VII.
EVENTS AT CLOSING.
Section 7.1. Simultaneous Occurrence of Events at
Closing. All of the events which are to occur at the Closing under
this Agreement, including but not limited to, the delivery of the Share
certificates and the payment of the Purchase Price and all other
related exchanges shall be deemed to have occurred simultaneously.
Section 7.2. Documents to be Delivered by the Sellers.
At the Closing, the Sellers shall deliver to the Purchasers and/or the
Company as applicable:
(a) The certificates for the Shares with a stock power
duly executed in blank for each certificate;
(b) The certificate of the Sellers specified in Section
4.6;
(c) The resignations of the Sellers and the other offi-
cers, employees, agents, and directors of the Com-
pany specified in Section 6.1;
(d) Any Business Records requested by the Purchaser
under Section 6.9;
(e) Any documents or certificates necessary to convey
control over each and every checking, savings, and
other operations accounts of the Company to the
Purchaser, including, without limitation, signature
cards;
- 51 -
[*51] (f) The Articles of Incorporation and By-Laws of the
Company certified by the Secretary of the Com-
pany; and
(g) A release, in form satisfactory to the Purchaser in
its sole discretion, of all claims, liabilities, obliga-
tions, loss, damage or responsibility that any of the
Sellers or Newco, LLC may have against the Com-
pany, including, without limitation, any claims,
liabilities or obligations for indemnification, con-
tribution or otherwise, but specifically excluding
any claims, liabilities or obligations arising out of
this Agreement or the transactions described here-
in, and any rights the Sellers have to enforce the
terms, conditions or obligations of the Asset Pur-
chase Agreements against the Asset Purchaser and
the Real Estate Purchaser.
Section 7.3. Documents to be Delivered by the Purchaser.
At the Closing, the Purchaser shall deliver to the Sellers:
(a) The Purchase Payment owed to each Seller or their
nominee;
(b) The certificate of the executive officer of Pur-
chaser as specified in Section 5.3;
(c) Certified resolutions of the Purchaser authorizing
the transactions contemplated by this Agreement;
(d) An incumbency certificate identifying the execu-
tive officers of Purchaser;
(e) The Articles of Organization and Operating
Agreement of Purchaser certified by the Secretary
of Purchaser within sixty (60) days of the Closing;
- 52 -
[*52] (f) The Stock Pledge Agreement executed by Pur-
chaser; and
(g) The Guaranty executed by MidCoast Credit Corp.
Section 7.4. Documents to be Delivered by the Company.
At the Closing, the Company shall deliver to the Purchasers and the
Sellers:
(a) The Redemption Payment to Sellers;
(b) Certified resolutions of the Company authorizing
the transactions contemplated by this Agreement;
and
(c) An incumbency certificate identifying the execu-
tive officers of the Company;
(d) The professional fees of the Sellers up to $20,000;
and
(e) A Certificate of Existence from the Indiana Secre-
tary of State.
* * * * * * *
ARTICLE IX.
INDEMNIFICATIONS.
* * * * * * *
Section 9.2. Indemnification Obligation of the Purchaser.
After the Closing, the Purchaser will reimburse, indemnify, defend
and hold harmless Sellers and their heirs, legal representatives, suc-
cessors or assigns (an “Indemnified Seller Party”) against and in re-
spect of any and all Indemnified Claims incurred or suffered by any
- 53 -
[*53] Indemnified Seller Party, as to which a Claim Notice is given in
accordance with Section 9.3 within the applicable time period spec-
ified in Section 6.7, and that results from, relates to or arises out of,
(i) any misrepresentation, breach of warranty or nonfulfillment of any
agreement or covenant on the part of the Purchaser under this Agree-
ment, (ii) any misrepresentation in or omission from any certificate,
schedule, written statement, document or instrument furnished to the
Sellers by Purchaser[] pursuant hereto, (iii) a liability or obligation
first arising subsequent to the Closing out of Purchaser’s operation of
the Company or conduct of the Company’s business from and after
the Closing, and (iv) any costs and expenses, including reasonable
attorney[s’] fees and expenses incurred in connection with the en-
forcement of this indemnification.
* * * * * * *
ARTICLE X.
MISCELLANEOUS.
Section 10.1. Expenses. Except for the $20,000 in profes-
sional fees of the Sellers (the “Professional Fees”), whether or not the
transactions contemplated by this Agreement are consummated, the
Sellers, for themselves and the Company, shall pay the Sellers’ and
the Company’s fees and expenses incurred in connection with the
negotiation, preparation and the consummation of all transactions
contemplated by this Agreement, including, without limitation, all
attorneys’, accountants’ and financing fees, and the Purchases like-
wise shall pay its own fees and expenses. In the event that the trans-
action contemplated by this Agreement does not close for any reason
(even as a result of a breach), the Seller shall not be entitled to have
the Professional Fees paid by Purchaser.
* * * * * * *
Section 10.3. Agreement is Entire Contract. This Agree-
ment and the other documents delivered pursuant hereto (including,
- 54 -
[*54] without limitation, the Schedules and Exhibits attached hereto)
constitute the entire contract between the parties hereto relating to the
subject matter hereof, and no party shall be liable or bound to the
other in any manner by any warranties, representations or covenants
except as specifically set forth herein and therein. The terms and
conditions of this Agreement shall inure to the benefit of and be
binding upon the respective heirs, legal representatives, successors
and assigns, of the parties here to, nothing in this Agreement, ex-
pressed or implied, is intended to confer upon any party, other than
the parties here to and their respective heirs, legal representatives,
successors and assigns, any rights, remedies, obligations or liabilities
under or by reason of this Agreement, except as expressly provided
herein.
Mr. Thrapp, who principally negotiated the terms in the SPRA of the
covenants, the representations, the warranties, and the indemnification obligations
of FFIA in the event of any breaches of any of those covenants, representations,
and warranties, believed that those obligations of FFIA were adequate for the
transactions to which FFIA, FFI, and the FFI stockholders agreed in the SPRA.
He held that belief even though FFIA was organized a few days before the closing
of the transactions in the SPRA and even though it had no assets at that time or
after that closing except for the stock of FFI.
On December 20, 2001, FFIA, FFI, the FFI stockholders, and Leagre
Chandler & Millard, LLP (Leagre), entered into an escrow agreement (SPRA
escrow agreement) in which Leagre was designated as escrow agent for the other
parties to that agreement and was to establish and maintain an escrow account
- 55 -
[*55] (Leagre escrow account). Under the terms of that agreement, an unnamed
investor agreed to provide certain funds as a “loan” to FFIA (Shapiro funds) that
FFIA was to use to acquire the stock of FFI that FFIA had agreed to purchase in
the SPRA. All the funds to be deposited under the terms of that escrow agreement
were to be deposited into the Leagre escrow account. The SPRA escrow agree-
ment provided in pertinent part:
This Escrow Agreement (the “Agreement”) is made and en-
tered into this 20th day of December 2001, by and between ffi corpo-
ration, an Indiana corporation (“ffi corporation”), FFI Acquisition,
LLC, an Indiana limited liability company (“FFI Acquisition”), Curtis
D. Fankhauser, Cynthia A. Fankhauser, and Thomas L. Weintraut, all
of which (sic) are Indiana residents and shareholders of ffi corpora-
tion (collectively, the “Shareholders”) and Leagre Chandler &
Millard LLP, as escrow agent (the “Escrow Agent”).
WITNESSETH
WHEREAS, the Shareholders and ffi corporation have entered
into a certain Share Purchase and Redemption Agreement [SPRA]
with FFI Acquisition, LLC, an Indiana limited liability company
(“FFI Acquisition”) dated December 20, 2001 (the “Share Purchase
Agreement”), whereby FFI Acquisition will purchase all of the
outstanding common shares of ffi corporation from the Shareholders
which are outstanding after the Redemption (as defined in the Share
Purchase Agreement) (the “Shares”) in consideration of approxi-
mately $530,766.15, as adjusted pursuant to the Share Purchase
Agreement (the “Share Purchase Price”);
WHEREAS, a certain investor related to FFI Acquisition (the
“Investor”) [Ms. Shapiro] has agreed to loan monies to FFI Acquisi-
tion to be used to fund the Share Purchase Price (the “Investor
- 56 -
[*56] Funds”), and the Escrow Agent has agreed to act as escrow agent
with respect to the Investor Funds in accordance with the terms and
conditions of that certain Escrow Agreement, attached hereto as
Exhibit A (the “Investor Escrow Agreement”); and
WHEREAS, ffi corporation has agreed to deposit certain
monies into escrow with the Escrow Agent to satisfy the terms and
conditions of the Investor Escrow Agreement and to facilitate the
closing under the Share Purchase Agreement.
NOW, THEREFORE, in consideration of the foregoing, the
mutual covenants of the parties set forth herein and the mutual bene-
fits to be derived herefrom, the parties, intending to be legally bound,
hereby agree as follows:
1. Delivery of Investor Funds into Escrow. The Investor
shall cause the Investor Funds to be delivered, by wire transfer, into
the Escrow Agent’s trust account (the “Escrow Account”) only after
ffi corporation deposits the remaining cash of ffi corporation into the
Escrow Account which is estimated to be $875,855.49 (the “ffi
funds”), and the Escrow Agent agrees to hold and disburse the Inves-
tor Funds and the ffi Funds in accordance with the terms and condi-
tions of this Agreement and the Investor Escrow Agreement.
2. Delivery of Shareholder Funds. At the Closing (as
defined in the Share Purchase Agreement), the Escrow Agent shall
deliver that portion of the Investor Funds to the Shareholders (in the
denominations set forth on the closing statement attached hereto as
Exhibit B (the “Closing Statement”) [Cash Reconciliation and Dis-
bursement Schedule of Escrow Funds by Leagre] required to satisfy
the Share Purchase Price in accordance with the terms and conditions
of the Share Purchase Agreement, provided all of the Shareholder’s
conditions precedent set forth in the Share Purchase Agreement have
been satisfied and the transaction has not been otherwise terminated.
3. Repayment of Investor Funds. At the Closing, the
Escrow Agent shall pay an amount equal to the Investor Funds to the
- 57 -
[*57] Investor, and shall pay the balance in the Escrow Account to FFI
Acquisition or its designee.
4. Delivery Upon Failure to Close. At anytime prior to the
execution of the Closing Statement by all of the Sellers, ffi corpora-
tion may instruct the Escrow Agent to return the ffi Funds to ffi
corporation or its designee, and upon receipt of such instructions, the
Escrow Agent shall cause the ffi Funds to be disbursed in accordance
with the instructions.
On December 20, 2001, FFIA, MidCoast, Ms. Shapiro, and Leagre entered
into an escrow agreement (Shapiro escrow agreement). According to the terms of
the Shapiro escrow agreement, to which the SPRA escrow agreement referred and
which was an attachment to the SPRA escrow agreement, Ms. Shapiro agreed to
provide $550,000 as a “loan” to FFIA (i.e., Shapiro funds). According to the
terms of the Shapiro escrow agreement, FFIA was to use the Shapiro funds to
acquire the stock of FFI that FFIA had agreed to purchase in the SPRA. All of the
funds to be deposited under the terms of the Shapiro escrow agreement were to be
deposited into the same Leagre escrow account into which all of the funds to be
deposited under the terms of the SPRA escrow agreement were to be deposited.
The Shapiro escrow agreement provided in pertinent part:
This Escrow Agreement (the “Agreement”) is made and en-
tered into this 20th day of December, 2001, by and between FFI
Acquisition, LLC, an Indiana limited liability company (“FFI Acqui-
sition”), MidCoast Credit Corp., a New York corporation (“MCC”),
MidCoast Acquisition Corp., a Florida corporation (“MAC”), Honora
- 58 -
[*58] Shapiro, a California resident and a shareholder of MidCoast Credit
Corp. (“Shapiro”), and Leagre, Chandler & Millard, LLP, as Escrow
Agent and counsel to FFI Acquisition, MCC and MAC (the “Escrow
Agent”), and Matthew Dollinger, Floyd Grossman and Jessica M.
Seidman, all as Attorney-in-Fact for Honora Shapiro (collectively the
“Dollinger Firm”).
WITNESSETH
WHEREAS, the shareholders of ffi Corporation, a[n] Indiana
Corporation (“ffi”), and FFI Acquisition have entered into a Share
Purchase Agreement dated as of December 20, 2001 (“Share Purchase
Agreement”), whereby FFI Acquisition intends to purchase all of the
issued and outstanding capital stock of ffi (the “Shares”) from Curtis
D. Fankhauser, Cynthia A. Fankhauser and Thomas L. Weintraut (the
“ffi Shareholders”) in consideration of the payment of the approxi-
mate sum of $550,000.00, as adjusted pursuant to the Share Purchase
Agreement (the “Share Purchase Price”);
WHEREAS, Shapiro has agreed to loan Five Hundred Fifty
Thousand and 00/100 ($550.000.00) Dollars to FFI Acquisition,
MCC and MAC to be used to fund the Share Purchase Price as re-
quired to be paid pursuant to the terms and conditions of the Share
Purchase Agreement (the “Shapiro Funds”), and Leagre, Chandler &
Millard, LLP has agreed to act as settlement agent for the transaction
and as Escrow Agent with respect to the Shapiro funds in accordance
with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing, the
mutual covenants of the parties set forth herein and the mutual
benefits to be derived here from, the parties, intending to be legally
bound, hereby agree as follows:
1. Delivery of Shapiro Funds Into Escrow. Shapiro shall
cause the Shapiro Funds to be delivered by wire transfer to the Es-
crow Agent’s trust account (the “Escrow Account”), and the Escrow
Agent agrees to hold and disburse the Shapiro Funds in accordance
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[*59] with the terms and conditions of this Agreement. The Escrow Ac-
count is maintained in the name of “Leagre, Chandler & Millard--
Trust Account”, with Hunting National Bank, 201 N. Illinois Street,
Suite 1800, Indianapolis, Indiana 46204 (ABA No.; 044000024), with
an Account Number of 01400666470.
2. Appointment of Attorney-In-Fact. Shapiro hereby
appoints and designates Mathew Dollinger and/or Floyd G. Gross-
man, and/or Jessica M. Seidman, all residents of the State of New
York (“Dollinger Firm”) as her true and lawful attorney-in-fact to:
(i) execute and deliver, in Shapiro’s name, any and all documents,
notices and/or instruments, including, without limitation, checks
and/or drafts for the payment and/or distribution of the Shapiro Funds
as contemplated by this Agreement and the Share Purchase Agree-
ment, and (ii) do and preform all acts on her behalf which are neces-
sary to effect the transaction contemplated by this Agreement and the
Share Purchase Agreement, all with the same force and effect as
though Shapiro was personally present, and Shapiro also hereby
ratifies and confirms that Dollinger Firm shall do by virtue hereof.
The power of attorney granted hereunder shall become effective when
this Agreement is signed by Shapiro, and shall continue in effect for
thirty (30) days from the date of the execution of this Agreement.
3. Delivery of Shapiro Funds. At the Closing (as defined
in the Share Purchase Agreement), the Dollinger Firm, in their discre-
tion, shall authorize and direct the Escrow Agent, in writing, to
deliver the Shapiro funds to FFI Acquisition, MCC and MAC for
delivery to the ffi Shareholders in accordance with the terms and
conditions of the Share Purchase Agreement provided (i) all of the
conditions precedent set forth in the Share Purchase Agreement have
been satisfied to the satisfaction of the Dollinger Firm; (ii) the Trans-
action Settlement Statement has been executed and delivered into
escrow by the parties; and (iii) the Escrow Agent has possession in
escrow of sufficient funds from ffi, or other sources, and authority in
escrow to immediately initiate a wire transfer of the sum of
$550,000.00 to the account of Shapiro. The Escrow Agent shall issue
to the Dollinger Firm written notice via facsimile certifying and
- 60 -
[*60] attesting that (i) the Transaction Settlement Statement has been
executed and delivered by all parties and (ii) the Escrow Agent has in
its possession good funds in the amount of at least $550,000.00,
which have been provided by ffi into the Escrow Account, and that
upon written notice via facsimile from the Dollinger Firm, the Escrow
Agent will proceed to disburse moneys to the parties of the Share
Purchase Agreement in accordance with the Settlement Statement and
simultaneously initiate a wire transfer of the sum of $550,000.00 from
the Escrow Account to the Shapiro Account (as defined below).
Simultaneously with the foregoing written notice, Escrow Agent shall
provide the Dollinger Firm with a copy of the fully executed Settle-
ment Statement. Upon receipt of written authorization from the
Dollinger Firm to release the Shapiro Funds, Escrow Agent hereby
agrees to deliver the Shapiro Funds and the ffi Funds held in Escrow
Agent’s Account in accordance with the terms of this Agreement.
4. Repayment of Shapiro Funds. In connection with the
Closing of the transaction contemplated by the Share Purchase Agree-
ment, ffi and/or the ffi shareholders shall be directed to pay the entire
cash assets of ffi into the Escrow Account, and the Escrow Agent
agrees to hold and disburse an amount equal to the Shapiro Funds in
accordance with terms and conditions of this Agreement. After the
Cash Assets of ffi have been declared to be good funds in the Escrow
Account, the Dollinger Firm, shall, pursuant to paragraph 3 above,
authorize the Escrow Agent, in writing, to forward, by wire transfer,
an amount equal to the Shapiro Funds, without interest, to the follow-
ing: “HSBC Bank, One Old Country Road, Carle Place, New York
11514, BA No. 021-001088 for further credit to Honora Shapiro in
Account No. 020-478658” (the “Shapiro Account”). Simultaneously
with initiation of the wire transfer from the Escrow Account and/or
the payment of the Purchase Price to the ffi Shareholders, the Escrow
Agent shall enter an order with the financial institution where the
Escrow Account is maintained to deliver the sum of $550,000.00 to
the Shapiro Account.
- 61 -
[*61] On December 20, 2001, FFIA, FFI, and the FFI stockholders signed a
document titled “Cash Reconciliation and Disbursement Schedule of Escrow
Funds by Leagre” (cash reconciliation agreement), which also was an attachment
to the SPRA escrow agreement. The cash reconciliation agreement set forth
directions to Leagre, the escrow agent, regarding the manner in which it was to
disburse the respective funds that were to be deposited into the Leagre escrow
account pursuant to the SPRA escrow agreement and the Shapiro escrow agree-
ment. The cash reconciliation agreement showed that FFI, Ms. Shapiro, and Mid-
Coast were to make the following deposits into the Leagre escrow account:
Depositor Amount
FFI $875,855.49
Ms. Shapiro 550,000.00
MidCoast 20,000.00
Total 1,445,855.49
The cash reconciliation agreement instructed the escrow agent, Leagre, to
make the following disbursements from the Leagre escrow account to the
following persons:
- 62 -
[*62]
Distributee Amount
Ms. Shapiro $550,000.00
Mr. Fankhauser 360,920.98
Mr. Weintraut 116,768.55
Ms. Fankhauser 53,076.62
Ice Miller 20,000.00
FFI 345,089.34
Total 1,445,855.49
On December 20, 2001, Mr. Shapiro on behalf of MidCoast and Mr. Fank-
hauser on behalf of FFW signed the guarantee (SPRA guarantee) that section
7.3(g) of the SPRA required. The SPRA guarantee provided in pertinent part:
FOR GOOD AND VALUABLE CONSIDERATION, the
receipt and sufficiency of which are hereby acknowledged, and in
connection with the consummation of the transactions contemplated
in (i) that certain Share Purchase and Redemption Agreement by and
among FFI Acquisition, LLC, an Indiana limited liability company
(“Purchaser”), ffi corporation, an Indiana corporation (“FFI”) and
Curtis D. Fankhauser, Cynthia A. Fankhauser and Thomas Weintraut
(collectively, the “Sellers”) (the “Share Agreement”) and (ii) that
certain assignment by FFI to FFW Holdings, LLC, an Indiana limited
liability company (“Holdings”), immediately prior to and as part of
the transactions contemplated by the Share Agreement, of FFI’s right
to receive a refund of the estimated federal corporate income tax pay-
ments made by FFI for its 2001 tax year (the “Tax Refund”) in the
approximate amount of $636,000 (the “Assignment”), the under-
signed, MidCoast Credit Corp., a Florida corporation (the “Guaran-
tor”), guarantees the payment of the Tax Refund by FFI to Holdings
within five (5) business days of the receipt by FFI of the Tax Refund,
- 63 -
[*63] as required by the terms of the Assignment. Notwithstanding any
other provision of this Guaranty to the contrary, the Guarantor shall
have no liability under this Guaranty unless and until payment of the
Tax Refund is received by FFI. In no event shall FFI’s liability ex-
ceed the amount actually received by FFI with respect to such Tax
Refund. This Guaranty shall continue and be in full force and effect
until the Tax Refund is fully paid to Holdings. Guarantor under-
stands and acknowledges that the Sellers were induced to enter into
the Share Agreement in reliance upon this Guaranty.
* * * * * * *
In the event the payment of the Tax Refund by FFI to Holdings
is held to constitute a preference under any bankruptcy law, or if for
any other reason Holdings is required to refund such payment or pay
the amount thereof to any other party, or if for any reason Holdings is
required to pay, repay or refund to FFI or to any other party any value
received by Holdings from any source in payment of or on account of
the Tax Refund, such payment by FFI or value received by Holdings
shall not constitute a release of Guarantor from any liability under
this Guaranty, but Guarantor shall continue to be liable to the same
extent as if such payment had not been made or such value received,
and Guarantor agrees to pay such amount to Holdings upon demand
and this Guaranty shall continue to be effective or shall be reinstated,
as the case may be, to the extent of any such payment or value.
As agreed to and shown in the cash reconciliation agreement, on December
20, 2001, FFI, Ms. Shapiro,39 and MidCoast made the following deposits into the
Leagre escrow account:
39
Pursuant to paragraph 1 of the SPRA escrow agreement, Ms. Shapiro
made her deposit into the Leagre escrow account only after FFI had made its
deposit into that account.
- 64 -
[*64]
Depositor Amount
FFI $875,855.49
Ms. Shapiro 550,000.00
MidCoast 20,000.00
Total 1,445,855.49
Before the closing of the transactions (SPR transactions) to which the
parties to the SPRA agreed, Mr. Thrapp, one of petitioners’ attorneys, concluded
that as of that closing the Leagre escrow account contained the funds needed to
effect the closing of those transactions, which included the $550,000 that he (and,
as discussed below, Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser) knew
Ms. Shapiro was to deposit into the Leagre escrow account on the day of the
closing. Mr. Thrapp reached that conclusion even though he (and, as discussed
below, Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser) knew that that
$550,000 was to be returned to Ms. Shapiro as of that closing.40 Mr. Thrapp also
knew, and he advised FFI, Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser,
that if FFI were not solvent as of the closing of the transactions to which they and
FFIA (MidCoast’s designee) had agreed in the SPRA and/or if FFI’s funds, as
40
Because the closing of the transactions under the SPRA was to be effective
as of 11:59 p.m. on December 20, 2001, the $550,000 was in fact returned to Ms.
Shapiro by wire transfer on the day after the closing, which Mr. Thrapp (and, as
discussed below, Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser) knew.
- 65 -
[*65] opposed to so-called new money, were used in order to effect the acquisition
by FFIA of the stock of FFI from the FFI stockholders, those stockholders would
be subject to possible claims under the laws of the State of Indiana by the creditors
of FFI. That was because those stockholders, who were so-called insiders, would
have received the assets of FFI.
Each of the FFI stockholders, each of whom had signed the SPRA, the
SPRA escrow agreement to which the Shapiro escrow agreement was attached,
and the cash reconciliation agreement which also was attached to the SPRA
escrow agreement, knew, as did Mr. Thrapp, that the so-called loan of $550,000
that Ms. Shapiro had deposited into the Leagre escrow account on December 20,
2001, before the closing of the transactions under the SPRA but only after FFI had
made its required deposit into that Leagre escrow account, was not evidenced by a
promissory note or other written document and did not bear interest. The FFI
stockholders, as well as Mr. Thrapp, also knew that that purported loan by Ms.
Shapiro was to be deemed repaid as of the closing of the transactions under the
SPRA, which was deemed to occur simultaneously pursuant to that agreement.41
41
Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser also knew, as did Mr.
Thrapp, that although they were deemed to receive as of the closing of the trans-
actions their respective proportionate portions of the purchase price for the
transfer of their FFI stock to FFIA, the wire transfers to their respective bank
(continued...)
- 66 -
[*66] Moreover, each of them knew, as did Mr. Thrapp, that pursuant to the SPRA
and the related agreements (i.e., the SPRA escrow agreement, the Shapiro escrow
agreement, and the cash reconciliation agreement) FFI was to deposit $875,855.49
into the Leagre escrow account as of the closing of the transactions under the
SPRA at 11:59 p.m. on December 20, 2001, and that FFI as FFIA’s designee was
to receive only $345,089.34 from that escrow account as of the closing of those
transactions.42 Each of Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser also
knew, as did Mr. Thrapp, that the difference between the amount that FFI was to
deposit into the Leagre escrow account (i.e., $875,855.49) and the amount that FFI
as FFIA’s designee was to receive from that escrow account (i.e., $345,089.34)
was equal to $530,766.15. Each of the FFI stockholders knew, as did Mr. Thrapp,
that that difference was equal to the amount of the purchase price that they were to
receive for their FFI stock under the SPRA from, according to the terms of that
agreement, FFIA.
41
(...continued)
accounts of those proportionate portions were not to occur until the day after the
closing of those transactions.
42
As was true of the respective wire transfers to Mr. Fankhauser, Mr. Wein-
traut, Ms. Fankhauser, and Ms. Shapiro, FFI received a wire transfer on the day
after the closing.
- 67 -
[*67] In addition, each of Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser
understood, as did Mr. Thrapp, that MidCoast through FFIA was purporting to
purchase FFI stock from them in order to acquire FFI so that MidCoast would be
able to use FFI’s cash in order to buy charged-off debt securities that MidCoast
intended to use in its so-called asset recovery business. However, each of the FFI
stockholders knew, as did Mr. Thrapp, that MidCoast through FFIA agreed in the
SPRA to pay them $530,766.15 in cash for their FFI stock and that as of the
closing of the SPR transactions FFI (FFIA’s designee) was to receive only
$502,789.34 (i.e., cash of $345,089.34 and the right to a refund of the FFI State
2001 income tax payments of $157,700). In other words, each of Mr. Fankhauser,
Mr. Weintraut, and Ms. Fankhauser knew, as did Mr. Thrapp, that MidCoast
through FFIA agreed in the SPRA to pay $530,766.15 in cash in return for only
$502,789.34, which MidCoast purportedly would use in the asset recovery
business that it was to operate in FFI.
Moreover, each of Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser
knew, as did Mr. Thrapp, or should have known, as Mr. Thrapp should have
known, that Ms. Shapiro’s so-called loan of $550,000 to FFIA was not needed or
used in order to effect the purchase of the FFI stock under the SPRA and that that
so-called loan was mere window dressing designed to make it appear that FFIA,
- 68 -
[*68] not FFI, was providing the funds to be paid to them for the transfer of their
FFI stock to FFIA. In other words, each of the FFI stockholders knew, as did Mr.
Thrapp, or should have known, as Mr. Thrapp should have known, that Ms. Sha-
piro’s so-called loan of $550,000 to FFIA was devoid of any economic substance--
a sham that was designed and intended to make it appear as though FFIA, not FFI,
was providing the funds to be paid to the FFI stockholders for the transfer of their
FFI stock to FFIA. Moreover, each of Mr. Fankhauser, Mr. Weintraut, and Ms.
Fankhauser knew, as did Mr. Thrapp, or should have known, as Mr. Thrapp should
have known, that the source of the funds that they were to receive for the transfer
of their FFI stock to FFIA was FFI, not FFIA. That is to say, each of the FFI
stockholders, as well as Mr. Thrapp, knew, or should have known, that FFI, not
FFIA, was to, and did, pay each of those stockholders each such stockholder’s
proportionate portion of the so-called purchase price (i.e., $530,766.15) that each
was to, and did, receive under the SPRA.
As of the closing of the transactions under the SPRA on December 20,
2001, FFI had no operations, no employees engaged in operations, no income, no
- 69 -
[*69] operational assets, and no liabilities except FFI’s total anticipated 2001 tax
liability of $1,026,100.69.43
On December 20, 2001, in accordance with the terms of the SPRA, the
followings transactions to which the parties agreed in the SPRA closed effective
as of 11:59 p.m. on that date: (1) FFI distributed all of its membership interests in
FFW to Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser and received from
them 75 percent of the outstanding stock of FFI (SPR redemption transaction),44
and (2) Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser transferred to FFIA
the remaining 25 percent of the outstanding stock of FFI that they owned and
received $530,766.15 (SPR sale transaction).45 As required by section 7.1 of the
SPRA, the SPR transactions were deemed to occur simultaneously.
On December 20, 2001, Mr. Fankhauser and Mr. Weintraut resigned as
officers, directors, and employees of FFI, as required by the SPRA. After their
resignations, Mr. Weintraut and Mr. Fankhauser had no further involvement in any
43
See supra note 34.
44
Upon FFI’s distribution to Mr. Fankhauser, Mr. Weintraut, and Ms. Fank-
hauser of all of the membership interests in FFW, they owned 68 percent, 22 per-
cent, and 10 percent, respectively, of FFW’s membership interests.
45
The respective portions of the $530,766.15 that Mr. Fankhauser, Mr.
Weintraut, and Ms. Fankhauser received are set forth below.
- 70 -
[*70] operations or any management of FFI.46 Nonetheless, as discussed below,
Mr. Weintraut, at Mr. Thrapp’s request, prepared and sent to MidCoast on
December 31, 2001, completed appropriate IRS forms requesting a refund of the
FFI Federal 2001 income tax payments.
At all relevant times after the closing of the transactions under the SPRA on
December 20, 2001, each of the following individuals was a director and/or an
officer of FFI:
Name Position
Mr. Bernstein Director and president
Ms. Sesco Treasurer and assistant secretary
Ms. Parra Secretary
Mr. Shapiro Director and executive vice president
On December 21, 2001, Leagre, as the escrow agent of the SPRA escrow
agreement and the Shapiro escrow agreement and pursuant to the cash reconcilia-
tion agreement, made the following distributions from the Leagre escrow account
to the persons indicated:
46
Ms. Fankhauser was not at any time involved in the operations or the
management of FFI.
- 71 -
[*71]
Distributee Amount
Ms. Shapiro $550,000.00
Mr. Fankhauser 360,920.98
Mr. Weintraut 116,768.55
Ms. Fankhauser 53,076.62
Ice Miller 20,000.00
FFI1 345,089.34
Total 1,445,855.49
1
The funds distributed to FFI were wired into a new account in FFI’s name
at SunTrust Bank (FFI’s SunTrust Bank account) that FFIA and Mr. Bernstein
controlled.
On December 21, 2001, Mr. Bernstein on behalf of MidCoast and FFIA and
in his individual capacity signed an agreement between those two entities and
himself. That agreement provided in pertinent part:
Notwithstanding the ownership of FFI Acquisition, LLC,
MidCoast Credit Corp. is the financial beneficiary of the ffi Corpora-
tion transaction and ownership of ffi Corporation. MidCoast Credit
Corp. shall receive all of the economic benefits of the limited liability
entity.
Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser were not aware of the
above-described agreement until respondent gave them a copy of it in anticipation
of the trial in these cases.
- 72 -
[*72] On December 20, 2001, after the SPR transactions closed simultaneously at
11:59 p.m., FFI did not have any business operations and did not commence any
asset recovery business operations or any asset receivable collection business
operations. At no time after the closing of the SPR transactions did FFI have any
business operations, including any asset recovery business operations or any asset
receivable collection business operations.
On December 20, 2001, after the SPR transactions closed simultaneously at
11:59 p.m., FFI had (1) assets totaling $502,789.34, which consisted of cash of
$345,089.34 and the right to a refund of $157,700 of State 2001 income tax pay-
ments, and (2) an anticipated Federal and State 2001 income tax liability and an
anticipated State income tax liability totaling $1,026,100.69, or a negative net
asset value of $523,311.35.47
On December 21, 2001, FFIA and Willow Holdings, LLC (Willow Hold-
ings), agreed to form FFI Financial, LLC (FFI Financial), and did so on December
24, 2001. Willow Holdings’ sole member was Willow Investment Trust, whose
trustee was Walter E. Schmidt (Mr. Schmidt).
47
See supra note 28 regarding FFI’s bank account balance of $11,955.46,
FFI’s outstanding checks of $11,955.46, and the Prudential demutualization funds
receivable of $43,926.57.
- 73 -
[*73] On December 26, 2001, Mr. Bernstein had $340,000 wired from FFI’s
SunTrust Bank account to a MidCoast account at the Bank of New York.
On a date not established by the record between December 24 and 31, 2001,
FFI Financial and FFI entered into an agreement under which FFI Financial agreed
to, and did, contribute U.S. Treasury bills (T-bills) to FFI, which Willow Holdings
had contributed to it, which had a value of $8,000, and which Willow Holdings
had represented to FFI Financial had a tax basis of $2,962,960. (We shall refer to
the transactions to which FFI Financial and FFI agreed concerning the T-bills as
the T-bill transaction.)
MidCoast, FFI Financial, and FFI received from Manatt, Phelps & Phillips,
LLP (Manatt), a Federal income tax opinion letter dated December 28, 2001
(Manatt opinion letter) regarding the T-bill transaction, for which MidCoast paid
Manatt $10,000. The Manatt opinion letter was based on certain representations
that FFI Financial, FFI, and Willow Holdings were to provide in a letter (represen-
tations letter) to be sent to Manatt (discussed below). The opinion letter stated in
pertinent part:
In accordance with your request, we provide the following
analysis and opinions relating to certain federal income tax conse-
quences of the transaction (the “Contribution”) whereby FFI Finan-
cial, LLC, a Delaware limited liability company (“Parent”), contrib-
uted eight Treasury Bills in the amount of $8,000 and having a
- 74 -
[*74] stated tax basis of $2,962,960 as of the date of Contribution (the
“Assets”) to FFI Corporation, an Indiana corporation (“Subsidiary”).
At the time of the Contribution, Parent owned all of the issued
and outstanding shares of Subsidiary. Subsidiary did not issue any
shares of its stock to Parent as a result of the Contribution because
(according to Parent) issuance of such shares in exchange for the
Assets would have been meaningless (due to the existing ownership
by Parent of 100% of Subsidiary).
For purposes of our opinion, we have examined the following
documents:
1. Letter regarding ownership allocation for FFI Financial,
LLC, dated December 21, 2001[.]
2. Certificate of Formation of FFI Financial, LLC, filed
with the Secretary of State of Delaware dated December 21, 2001.
3. Limited Liability Company Agreement of FFI Financial,
LLC, dated as of December 24, 2001.
4. Unanimous Written Consent of the Sole Member of
Willow Holdings, LLC, a Delaware limited liability company,
concerning FFI Financial, LLC, dated December 24, 2001.
5. Unanimous Written Consent of the Sole Member of FFI
Acquisition, LLC, a Delaware limited liability company, concerning
FFI Financial, LLC, dated December 24, 2001.
6. Unanimous Written Consent of the Members of FFI
Financial, LLC, authorizing the Contribution, dated December 26,
2001.
7. Unanimous Written Consent of the Directors of FFI
Corporation authorizing the Contribution dated December 26, 2001.
- 75 -
[*75] 8. Contribution and Assumption Agreement by and
between FFI Financial, LLC, and FFI Corporation, dated December
26, 2001.
Our understanding of the facts related to this opinion letter is
derived in part from our review of copies of the documents listed
above. We have assumed, without independent investigation, that
(a) such copies constitute true, accurate and complete copies of the
originals of such documents; (b) such documents reflect the valid and
binding obligations of the respective parties thereto and are enforce-
able in accordance with their terms; (c) such documents reflect the
entire agreement among the respective parties thereto with respect to
the subject matters thereof; and (d) the transactions that are the
subject of such documents were carried out in accordance with the
terms of such documents. If there were, are or will be material trans-
actions in connection with the Contribution that are not described in
the documents listed above or in your representation letter to us
referred to below, or are not carried out as described therein, our
opinions could be adversely affected.
We have also relied for purposes of this letter on facts set forth
in a representation letter from Parent and Subsidiary to us of even
date herewith. Among the representations in that letter is the repre-
sentation that, for federal income tax purposes, Parent’s tax basis for
the Treasury Bills that Parent contributed to Subsidiary was
$2,962,960 immediately before the Contribution. We have assumed,
without independent investigation, the accuracy and completeness of
all such representations. If such representations at any time are not
true, correct and complete, our opinions could be adversely affected.
The Internal Revenue Service takes the position that genuine
non-tax business purposes must be present in the case of an asset
contribution in order for a transaction to meet the requirements of
Section 351 of the Internal Revenue Code of 1986, as amended (the
“Code”). Both Parent and Subsidiary have represented that they have
substantial non-tax business reasons for engaging in the Contribution
and that they entered into the Contribution principally with a view
- 76 -
[*76] towards making an economic profit apart from tax consequences.
According to Parent and Subsidiary, their non-tax business purposes
were as follows: The contributed assets will strengthen the balance
sheet of Subsidiary in preparation for Subsidiary entering into a new
line of business. Subsidiary also will use pre-Contribution assets in
its new business. The new business is that Subsidiary will purchase
portfolios of credit card receivables and collect those receivables.
Subsidiary’s anticipated cumulative internal rate of return from
realization of the receivables, assuming reinvestment of the proceeds
of receivables collection, according to a pro forma cash flow state-
ment prepared by MidCoast Credit Corp. for Subsidiary, on a dis-
counted present value basis (using a 6% discount factor), is 312.41%
over 10 years. Subsidiary will also enter into a collection and man-
agement agreement with MidCoast Credit Corp. in pursuance of this
business.
Any change or inaccuracy in the facts set forth in the docu-
ments specified above or in the above-referenced representations
letter could adversely affect our opinions. We have undertaken no
obligation to monitor subsequent developments after the Contribution
or to analyze them as they may affect the opinions set forth in this
letter.
In rendering these opinions, we have examined such available
documents, laws, regulations and other legal matters as we have
considered necessary or appropriate for purposes of the opinions
expressed herein. We have not made any independent investigation
in rendering these opinions other than as described herein. We have
not been requested to make any such independent investigation.
Our opinions are based upon the Code as of the date hereof, the
legislative history of the Code, currently applicable regulations
promulgated thereunder (including proposed regulations), published
administrative positions of the Internal Revenue Service in revenue
rulings and revenue procedures, and judicial decisions. Such legal
authorities are all subject to change, either prospectively or retroac-
tively. No assurance can be provided as to the effect of any such
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[*77] change upon our opinions. We have undertaken no obligation to
update this letter.
The opinions set forth herein have no binding effect on the
Internal Revenue Service or the courts. No assurance can be given
that, if contested, a court would agree with the opinions set forth
herein. The opinions set forth herein represent rather our best legal
judgment as to the likely outcome of the issues addressed herein if
such issues were litigated and all appeals exhausted.
In the case of transactions such as the Contribution, many
federal, state and local income and other tax consequences arise.
We have been asked only to address the issues specifically set forth
below. No opinion is expressed regarding any other issue.
This letter is being issued solely for the benefit of FFI Corpora-
tion and for the benefit of FFI Financial, LLC, as the sole shareholder
of Subsidiary as of the date of the Contribution. It may not be relied
upon by any other person without our prior written consent.
Subject to the foregoing, it is our opinion that, more likely than not:
(a) The Contribution satisfied the requirements of Section 351 of
the Code.
(b) The tax basis for the Assets transferred from Parent to Sub-
sidiary in the Contribution was a carryover tax basis in
accordance with Section 362 of the Code.
(c) Based on the representations made to us in the above-
referenced representations letter from Parent and Subsidiary,
the carryover tax basis for Subsidiary was $2,962,960 for the
Treasury Bills Parent contributed to Subsidiary.
The representations letter dated December 28, 2001, which as of February
15, 2002, Mr. Schmidt had signed on behalf of Willow Holdings, but which Mr.
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[*78] Bernstein had not signed on behalf of FFI Financial and FFI, stated in
pertinent part:48
FFI Financial, LLC, a Delaware limited liability company
(“Parent”), and FFI Corporation, an Indiana corporation (“Subsid-
iary”), have requested your opinion regarding certain federal income
tax consequences of a transaction (the “Contribution”) whereby
Parent transferred eight Treasury Bills in the amount of $8,000,
having a stated value of $8,000 and having a stated tax basis of
$2,962,960 as of the date of the Contribution (the “Assets”) to Sub-
sidiary.
The undersigned officer of Parent and the undersigned officer
of Subsidiary have full power and authority to commit Parent and
Subsidiary, respectively, to the representations contained in this letter.
Willow Holdings, LLC, a Delaware limited liability company and a
member of Parent (“Willow Holdings”) also represents herein Par-
ent’s tax basis for the Assets immediately prior to the Contribution.
The officer of Willow Holdings signing below has full power and
authority to make such representation. Parent and Subsidiary under-
stand that the conclusions in your opinion letter are dependent in part
on the accuracy of this representations letter and that your opinion
could be adversely affected if this representations letter is not true,
complete and correct.
Parent and Subsidiary have seen a draft of your tax opinion
letter prior to issuance of this representations letter. That draft
opinion letter makes specific reference to certain listed documents.
Parent and Subsidiary understand that your opinion letter could be
adversely affected if there were material transactions in connection
with the Contribution that are not described in those listed documents
or in this representations letter, or were not carried out as described
therein and herein.
48
The record does not establish whether Mr. Bernstein ever signed the
representations letter.
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[*79] Parent and Subsidiary have asked you to address solely the
federal income tax consequences of the Contribution that are specifi-
cally set forth in your draft tax opinion letter referred to above.
Parent and Subsidiary are aware that the Contribution may involve
many other tax issues and consequences under the Internal Revenue
Code of 1986, as amended (the “Code”), and other tax statutes.
However, Parent and Subsidiary have not asked you to consider or
render an opinion regarding such other tax issues.
For purposes of your tax opinion, Parent, Subsidiary and
Willow Holdings (as appropriate) represent to you, after due investi-
gation, as follows:
1. All factual statements in your draft tax opinion letter
concerning the Contribution are true, correct and complete.
2. Parent and Subsidiary took all proper actions to transfer
from Parent to Subsidiary beneficial ownership of the Assets. Parent
did not retain any beneficial ownership in the Assets it transferred to
subsidiary.
3. Both Parent and Subsidiary had substantial non-tax
business reasons for engaging in the Contribution. Both Parent and
Subsidiary entered into the Contribution principally with a view
toward making an economic profit apart from tax consequences. The
Contribution will strengthen the balance sheet of Subsidiary in prepa-
ration for Subsidiary entering into a new line of business. Subsidiary
also will use pre-Contribution assets in its new business. The new
business is that Subsidiary will purchase portfolios of credit card
receivables and collect those receivables. Subsidiary’s anticipated
cumulative internal rate of return from realization of the receivables,
assuming reinvestment of the proceeds of receivables collection,
according to a pro forma cash flow statement prepared by MidCoast
Credit Corp. for Subsidiary, on a discounted present value basis
(using a 6% discount factor), is 312.41% over 10 years. Subsidiary
will also enter into a collection and management agreement with
MidCoast Credit Corp. in pursuance of this business.
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[*80] 4. Parent and Subsidiary have treated and will treat the
Contribution in a manner that is consistent with its form.
5. At the time of the Contribution and thereafter, Parent
owned 100% of the issued and outstanding shares of Subsidiary. Due
to its ownership of all of the Subsidiary stock, issuance of more Sub-
sidiary shares to Parent in connection with the Contribution would
have been meaningless. For this reason, Subsidiary did not issue
shares to Parent as a result of the Contribution. The members of
Parent formed Parent and made their contributions of assets to Parent
principally for substantial business purposes. These reasons included
strengthening the capitalization of Parent so that Parent could act as a
holding company for Subsidiary and have the flexibility to engage in
future business opportunities in a holding company structure.
6. No stock or securities were or will be issued by Subsid-
iary for services rendered to or for the benefit of Subsidiary in con-
nection with the Contribution. No stock or securities were or will be
issued by Subsidiary for indebtedness of Subsidiary that is not evi-
denced by a security or for interest on indebtedness of Subsidiary
which accrued on or after the beginning of the holding period of
Parent for the debt.
7. Parent neither accumulated receivables nor made any
extraordinary payment of payables in anticipation of the Contribution.
Subsidiary has report and will reported items which, but for the Con-
tribution, would have resulted in income or deduction to Parent in a
period subsequent to the Contribution and such items have and will
constitute income or deductions to Subsidiary when received or paid
by Subsidiary.
8. The Contribution was not the result of solicitation by a
promoter, broker or investment house.
9. Subsidiary did not take the Assets subject to any debt
and did not assume any debt of Parent in connection with the Contri-
bution.
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[*81] 10. There was no indebtedness between Subsidiary and
Parent and there was no indebtedness created in favor of Parent as a
result of the Contribution.
11. The Contribution occurred under a plan agreed upon
before the Contribution in which the rights of the parties were de-
fined.
12. There was no plan or intention on the part of Subsidiary
to redeem or otherwise reacquire any Subsidiary stock held by Parent.
13. Taking into account any issuance of additional shares of
Subsidiary stock, any issuance of stock for services, the exercise of
any Subsidiary stock rights, warrants or subscriptions, any public
offering of Subsidiary stock and the sale, exchange, transfer by gift,
or other disposition of any of the stock of Subsidiary held by Parent,
Parent was the sole shareholder and in “control” of Subsidiary within
the meaning of Section 368(c) of the Code at the time of the Contri-
bution. At the time of the Contribution, Parent was not under a bind-
ing obligation, and had no plan or intention, to dispose of any portion
of its stock in Subsidiary following the Contribution.
14. Subsidiary and Parent each paid their own expenses
increased in connection with the Contribution.
15. At the time of the Contribution, Subsidiary was not an
“investment company” within the meaning Section 351(e) of the
Code.
16. Willow Holdings, a member of Parent, represents that,
for federal income tax purposes, Parent’s tax basis for the Treasury
Bills that Parent contributed to Subsidiary was $2,962,960 immedi-
ately before the Contribution.
17. You may rely on the accuracy of the representations
herein for purposes of your tax opinion letter without further inquiry
or independent investigation.
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[*82] 18. Parent and Subsidiary hereby consent to your reference
to this representations letter in your tax opinion letter.
19. The undersigned have undertaken such investigation as
the undersigned deemed necessary to ensure the accuracy of the
foregoing representations.
On a date not established by the record between December 20 and 31, 2001,
Mr. Thrapp asked Mr. Weintraut to prepare Form 4466, Corporation Application
for Quick Refund of Overpayment of Estimated Tax (Form 4466). On December
31, 2001, Mr. Weintraut mailed to MidCoast a completed, but unsigned,49 Form
4466, Corporation Application for Form 4466, for FFI (FFI’s Form 4466). That
form showed “total tax from Form 1120” of zero and an “[o]verpayment of
estimated tax” of “$628,592.00”. On January 4, 2002, FFI’s Form 4466, which
Mr. Bernstein had signed on behalf of FFI, was mailed to the IRS. At a time not
established by the record, Ms. Sesco sent a note to Mr. Weintraut informing him
that FFI’s Form 4466 had been sent to the IRS. On January 17, 2002, the U.S.
Department of the Treasury issued a check for $628,592 to FFI with respect to its
taxable year 2001, which FFI endorsed to FFW.
49
Mr. Weintraut did not sign FFI’s Form 4466 on behalf of FFI because
following his resignation on December 20, 2001, he was no longer an officer or a
director of FFI.
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[*83] On January 14, 2002, Form 966 that Ms. Sesco had signed on behalf of FFI
was mailed to the IRS. In that form, FFI indicated that it no longer intended to
liquidate as it had indicated in Form 966 that it had submitted to the IRS on
October 19, 2001.
In January 2002, FFI received from the State of Indiana three checks total-
ing $5,756.56 that constituted refunds by that State of certain retail sales tax (retail
sales tax refunds). FFI estimated the respective Federal and State income tax
liabilities on those refunds, deducted 51 percent of those estimated total liabilities
from the $5,756.56 of retail sales tax refunds that it had received, and sent the
balance (i.e. $4,608.26), to FFW.50
Tax Returns
Mr. Weintraut timely filed Form 1040, U.S. Individual Income Tax Return
(Form 1040), for his taxable year 2001. Mr. Fankhauser and Ms. Fankhauser filed
jointly Form 1040 for their taxable year 2001. In those respective forms, Mr.
50
No one associated with FFI or with MidCoast was aware of the retail sales
tax refunds totaling $5,756.56 at the time MidCoast proposed the transactions in
the letter of intent and at the time of the closing of the transactions under the
SPRA. As a result, those refunds had no effect on the share purchase price
calculated in the December 18, 2001 balance sheet (discussed above). Conse-
quently, for convenience, we shall not refer, except infrequently, to the State retail
sales tax refunds as an asset of FFI when we discuss the transactions and the
events that are relevant to the issues presented here.
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[*84] Weintraut and Mr. Fankhauser and Ms. Fankhauser reported the gain that
each had realized on December 20, 2001, as a result of the SPR transactions under
the SPRA. Mr. Weintraut and Mr. Fankhauser and Ms. Fankhauser timely paid
their respective Federal income taxes on those respective gains.
On May 13, 2002, the IRS granted FFI an extension of time until September
15, 2002, within which to file Form 1120, U.S. Corporation Income Tax Return
(Form 1120), for its taxable year 2001 (2001 tax return). On September 18, 2002,
respondent received FFI’s 2001 tax return.
In Schedule D, Capital Gains and Losses (2001 Schedule D), attached to
FFI’s 2001 tax return FFI reported a “[s]ale price” of “$655,776”, “[c]ost or other
basis” of “$661,527”, and long-term capital loss of “$5,751” with respect to a
“SALE OF SECURITIES” on January 2, 2001. In the 2001 Schedule D, FFI
reported a “[s]ale price” of “$8,196”, “[c]ost or other basis” of “$2,962,960”, and
long-term capital loss of “$2,954,764” with respect to a sale of T-Bills on Decem-
ber 27, 2001. (We shall refer collectively to the long-term capital losses totaling
$2,960,515 that FFI claimed in the 2001 Schedule D as the claimed 2001 Schedule
D losses.)
In Form 4797, Sales of Business Property, attached to its 2001 tax return,
FFI reported a net gain $1,478,038 (gain from the sale of business property) from
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[*85] a “Sales or Exchanges of Property Used in a Trade or Business and In-
voluntary Conversions from Other Than Casualty or Theft”. FFI reduced the gain
from the sale of business property by the claimed 2001 Schedule D losses of
$2,960,515. As a result, FFI reported a net long-term capital loss in the 2001
Schedule D of $1,482,477. Of the portion of that capital loss that was used to
offset the $1,478,038 of gain from the sale of business property, all except $5,751
(i.e., $1,472,287) was attributable to the T-bill transactions (T-bill claimed loss).
FFI also claimed in its 2001 tax return deductions of (1) $771,260 for “legal
and professional” expenses, (2) $35,000 for a “management fee”, and (3) $225 for
a rent expense. After taking into account those three claimed deductions and
certain other deductions in its 2001 return, FFI reported in its 2001 tax return
“[t]axable income” of “$1,007,345”, “[t]otal tax” of “$143,003”, and “tax due” of
“$143,003”. FFI did not pay any part of the tax shown due in its 2001 tax return
when it filed that return. FFI filed Form 1138, Extension of Time for Payment of
Taxes by a Corporation Expecting a Net Operating Loss Carryback, dated March
3, 2002, in which it indicated that it expected a net operating loss for its taxable
year 2002 that would exceed the amount of its taxable income for its taxable year
2001.
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[*86] On September 22, 2003, the IRS received FFI’s Form 1120 for its taxable
year 2002 (2002 tax return). In its 2002 tax return, FFI reported negative “[t]ax-
able income” and a net operating loss of $902,722 (2002 NOL). Of the 2002 NOL
of $902,722, FFI carried back (1) $31,048 to its taxable year 1997 and
(2) $871,674 to its taxable year 2001.
On September 23, 2004, the IRS received FFI’s Form 1120 for its taxable
year 2003 (2003 tax return). In its 2003 tax return, FFI reported negative “[t]ax-
able income” and a net operating loss of $14,550 (2003 NOL). FFI carried back
all of the 2003 NOL of $14,550 to its taxable year 2001.
IRS Examination With Respect to FFI and Petitioners
Around July 22, 2005, respondent began an examination of FFI’s taxable
year 2001. Around December 2, 2005, respondent began an examination of FFI’s
taxable year 2002 from which $871,674 of its claimed 2002 NOL of $902,722 had
been carried back to its taxable year 2001. Around July 31, 2008, respondent be-
gan an examination of FFI’s taxable year 2003 from which all of its claimed 2003
NOL of $14,550 had been carried back to its taxable year 2001. FFI was repre-
sented by counsel throughout the IRS’ examination of its taxable years 2001,
2002, and 2003 and the resolution of that examination (discussed below).
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[*87] During the period that started in 2005 and ended in 2008, Mr. Bernstein,
who was then president of FFI, executed on behalf of FFI several Forms 872-I,
Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items
of a Partnership, in which FFI consented to the extension to various dates of the
period of assessment of FFI’s Federal income tax for its taxable years 2001. The
last of those forms that Mr. Bernstein executed around the end of July 2008 ex-
tended the time for assessment of that tax to December 31, 2009.
Around October 27, 2006, respondent assigned the same revenue agent who
was examining FFI’s taxable years 2001 and 2002 to begin a transferee liability
examination with respect to Mr. Fankhauser, Mr. Weintraut, and Ms. Fankhauser
as the stockholders of FFI before the closing of the transactions under the SPRA
on December 20, 2001. Since the IRS’ examination of FFI’s taxable years 2001
and 2002 was still ongoing and respondent had not yet initiated an examination of
FFI’s taxable year 2003 from which FFI had carried a loss back to its taxable year
2001, that transferee liability examination remained inactive until the IRS had
completed its examination of FFI’s taxable years 2001, 2002, and 2003 and had
undertaken collection efforts relating to the respective tax liabilities for those
years with which, as discussed below, FFI agreed.
This text is long and has been trimmed here. Open the source document for the complete record.