# Weintraut v. Comm'r > United States Tax Court · July 27, 2016 · 112 T.C.M. 122 URL: https://www.frixlaw.com/law-library/cases/4340383 ## Case - **Full name:** THOMAS L. WEINTRAUT, TRANSFEREE,1 v. COMMISSIONER OF INTERNAL REVENUE - **Court:** United States Tax Court - **Decided:** July 27, 2016 - **Citations:** 112 T.C.M. 122; 2016 T.C. Memo. 142; 2016 Tax Ct. Memo LEXIS 141 - **Precedential status:** Unpublished - **Opinion:** Opinion - **Cited by:** 3 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4340383 ## How later opinions describe it (automated extraction) - finding knowledge is not required under Indiana law but also holding that the transferee had knowledge assuming that State law required such knowledge ## Opinion text 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 - 59 - [*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 S [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4340383. Public record. Not legal advice.