UNITED STATES TAX COURT

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T.C. Memo.

2010-20-3

UNITED STATES TAX COURT

LR DEVELOPMENT COMPANY LLC, TRANSFEREE, Petitioner 1.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 8836-06.

Filed September 16, 2010.

Jenny L-. Johnson, Ziemowit T. Smulkowski, and Denis J.

Conlon, for petitioner.

Lawrence C. Letkewicz, David B. Flassing, and Justin D.

Scheid, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

CHIECHI, Judge:.

Respondent determined that petitioner LR

Development Co. LLC is liable as a transferee for the de.ficiency

of $7,507,972 in, and the accuracy-related penalty under section

SERVED SEP 162019

- 2 6662(a)1 of $1,501,594.50 on, the Federal income tax (tax) of

Bruce C. Abrams, Inc.

(BCA),2 for BCA's short taxable year ended

December 31, 2000, as well as interest thereon as provided by

law.

We must decide whether to sustain respondent's determina-

tion.

We hold that we shall not.

FINDINGS OF FACT

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

At the time it filed the petition, petitioner maintained its

principal office in Illinois.

In 1988, BCA was incorporated under Illinois law in order to

(1) develop high- end re s ident ial - condominiums in Chicago, Illi nois (Chicago) ,

(2) renovate historic buildings in and around

Chicago and, adapt them to different uses, and (3) develop affordable housing projects in Illinois.

At all relevant times prior

to August 1, 2000, BCA was an S corporation.

At all relevant times until December 12

1999, Bruce C.

Abrams (Mr. Abrams) was the president and the sole stockholder of

BCA.

On December 12, 1999, Mr. Abrams died.

As a result, Mr.

Abrams' estate (Abrams estate) became the sole stockholder of

All section references are to the Internal Revenue Code

(Code) in seffect at all relevant times. All Rule references are

to the Tax Court Rules of Practice and Procedure.

2From its incorporation, BCA conducted its business under

the name "LR Development Co." We shall refer to, that corporation

as BCA in order to prevent confusion with petitioner LR Development Co. LLC.

BCA.

At all relevant times, Mr. Abrams' wife, Nancy Abrams (Ms.

Abrams), served as the executrix of the Abrams estate.

Sometime between Mr. Abrams' death on December 12, 1999, and

December 30, 1999, Ms. Abrams appointed David Kirshenbaum (Mr.

Kirshenbaum) as president of BCA.3

On January 5, 2000, Ms.

Abrams appointed the following individuals as directors of BCA:

Her father Byron Canvasser, her brother Robert Canvasser, and

Andrew Hochberg.

At all relevant times, the following individuals who constituted the senior management of BCA held the offices in BCA

indicated:

Name

David Kirshenbaum

Steven Shernan

Donald Biernacki

Kerry Dickson

Laura Davis Molk

Thomas Weeks

David Dresdner

Kenneth Rice

Stephen Galler

Theodore Weldon

Title

President

Chief financial officer

Senior vice president-construction

Senior vice president-development

Senior vice president-marketing

Senior vice president-for-sale properties

Senior vice president-commercial properties

Senior vice president-affordable housing

Senior vice president and

general counsel

Vice president--

acquisitions

3From 1996 until he became president of BCA, Mr. Kirshenbaum

had served as its chief operating officer.

f 4 -

Glen Krandel

Ann Thdmpsori

Vice president-information technology

Vice president and

director of

architectural design

(We shall'refer collectively to all of BCA's officers'listed

above , except Mr . Kirshenbaum, as BCA senior management . )

Wìthin a few days after Mr. Abrams' death, Ms. Abráms, as

executrix of the Abrams estate, decided to sell the stock of BCAs

that that estate owned.

The Abrams estate was unwilling to dause

BCA to sell its assets.

Sometime before early April 2000, Ms. Abrams, as executrix

of the Abrams estate, retained Mayer, Brown & Platt (Mayer Brown)

to serve as that estate' s attorneys wi'th respect to the sale of

BCA .

On February 1, 20 0 0 , Ms . ,Abrams , as executr ix of the Abrams

estate, retained Cohen Financial Corp.

(Cohen Financial) , an

investment~ b'anking firm with its principal' office in Chicago, to

assist that estate in valuing and selling BCA.4

Services L.P.

CFC Advisory

(CFC Advisory) , an entity thats Cohen Financial

owned, was to provide that assistance.

On February 1, 2000, the

Abrams estate and CFC Advisory entered into an agreement (CFC

engagement agreement) for CFC Advisory to do so."

4Before Mr. Abrams' death, Cohen Financial ihad provided

financing to BCA for certain of its real estate development

projects,

sAlthough the record establishes that CFC Advisory ¯performed

the services under the CFC engagement agreement, the parties

(continued. . . )

- 5 On July 1, 1992, The Related Companies, L.P.

(Related), a

limited partnership, was organized under New York law to acquire,

own, develop, finance, operate, maintain, and manage real estate,

primarily residential and retail properties.

At all relevant

times, Stephen Ross e(Mr. Ross) owned indirectly the majority of

the interests in Related.'

as chairman of Related.

During those times, Mr. Ross served

At all relevant- times, Jeff Blau (Mr.

Blau) owned a limited partnership interest in Related that ranged

from 8 percent to 15 percent, depending on each project that

.Related undertook.7

On January 1, 2000, Mr. Blau, who had been

serving as a senior vice president of Related, became its president.

At all relevant timesrsince 1996, Michael Brenner (Mr.

Brenner) owned a 1-percent.limited partnership interest'-in

Related.

During those times, Mr. Brenner served-as executive

vice president and chief financial officer of that company.

In late December 1999,~ shortly after Mr. Abrams' death, Mr.

Blau learned from a cousin of Ms. Abrams that the Abrams estate

s(...continued)

indicated in the stipulation of facts that Cohen Financial

performed certain services under that agreement.

Since the CFC

engagement agreement is between the Abrams estate and CFC Advisory, we shall refer to CFC Advisory when discussing services

performed under that agreement.

6The record does not reflect the -nature of Mr. Ross' interests in Related.

7The record does not explain how Mr. Blau's ownership interest in Related could have varied depending on the project that

Related undertook.

- 6 plannedato sell BCA and certain other, assets that-that-estate

owned.

At that time, . Related decided- to attempt to purchase

certain assets of BCA."

To that end, a representative of Related

contacted a representative of- the Abrams estate to-express an

interest in purchasing certain of BCA's.assetsa"

unwilling to purchase any stocktof BCA.

.Related was

Related wanted-to

purchase certain assets, and nót the stock, of BCA because

Related; (l) intended to sell icertain of BCA' s assets that it was

able to purchase from BCA within a few years after it had purchased them and wanted to have a cost basis in each such asset,

(2) was unwilling to .hold stock of a corporation -because it

wished to conduct its-business through pass-through entities as

it had in.the past, tand (3) was concerned about anysunknown a

liabilities that BCA might have had as a result of acertain

actions -that Mr.'Abrams had taken as :president of BCA.

On December 27, 1999, Byron Canvasser, who was a director of

BCA and Ms. Abrams' father, sent a memorandum on behalf of the

Abrams estate to Mr. Blau of Related.

Byron Canvasser included -

with that memorandum, inter alia, the following information

regaiding the respective book values of~BCA's assets; as well as

"Mr. Blau, Mr. Brenner, and Mr. Ross all participated in the

decisionmaking process of.Related regarding its interest in,

purchasing certain assets of BCA.

'In certain instances, the record does not, establish the

identities of the individuals who acted on behalf of the various

entities involved in this case.

- 7 the respective real estate activities and joint venture activities of BCA, as of September 30, 1999:

Entity/Joint Venture

Real estate activities:

N.B.A.L. LLC

Diversey & Sheffield LLC

Dearborn & Elm LLC

BCA's

Ownership

9/30/99

Percentage

Book Value

100

($1,287,725)

(661,674)(74,247)

Ridge Partners LP

862

Walton Associates LLC

(442,380)

3830-32 Lincoln Joint Venture

6,523

310 N. Michigan

Winners~LP

100

21,757

213,815

Renaissance Partners LLC

5,000

St. Benedict's Hotel LLC

(4,699)

(2,222,768)

LR Fort Sheridan LLC

100

3,708,699

Mayfair Condominium LLC

100

-0-

LR Arcade LLC

Vision Capital LLC

Vision AHC LLC

LR Tower LLC

Plaines Town Center LLC

100

Total

1,000,000

545

204,046

(690,341)

12,298

4,235,247

Combined total

2,012,479

Total

Joint venture activities:

In early January 2000, representatives of Related met with

respective representatives of the Abrams estate and BCA regarding

Related's interest in purchasing certain of BCA's assets.

Thereafter through March 2000, respective representatives of BCA,

the Abrams estate, and Related conducted initial negotiations and

exchanged information in an attempt to reach an agreement regard-

- 8 ing the sale to Related of certain assets of BCA.

Those'initial

negotiations were unsuccessful.

In late March or early April 2000, Ronald Katz (Mr. Katz) ,

one of Related' s accountants who was with Rubin & Katz, told a

representative of Related about Fortrend International LLC

(Fortrend) with which Mr . Kat z had

orked in the s past .

At all

relevant times, Fortrend was an investment banking firm in which

Jeffrey Furman (Mr. Furman) and Frederick Forster (Mr. Forster)

each owned indirectly a 50-percent interest.1°

Fortrend indi-

cated in certain marketing materials (Fortrend brochure) that it

had circulated between 1997 and November 2003 tihat it

"[structuredl economic transactions to solve specific corporate

tax or accounting problems or to take advantage of related

opportunities "

One such problem described in the Forti-end

brochure was the "sale of appreciated businesses".

In this

regard, the Fortrend brochure stated:

The sale of appreciated, businessés by corporations or

individuals that hold the businesses directly, or in

one or more subsidiaries, will often produce substan

tial tax liabilities due to the gain on the sale.

This

tax liability often results in conflicting desired

transaction structures; the seller wants to sell shares

to minimize current taxes while the buyer wants to buy

assets to "obtain 1) a step-up in tax basis in the

assets and 2) the ability to recover the full purchase

price (ïncluding goodwill) through depreciation or am-

At all relevant . times, Howard Kramer (Mr. Kramer) was a

senior managing director of Fortrend. During 2000, Fortrend

employed Randolph Whitney Bae (Mr. Bae) -in ran undisclosed capacity.

ortization deductions. Fortrend can often arrange for

the sale of the business at a price which substantially

increases the seller's after-tax profits.

Similarly,

when a client wishes to purchase assets held by a corporation, Fortrend can often negotiate a lower price.

Fortrend described in the Fortrend brochure one of the

methods used to solve certain "problems"- associated with the.sale

of appreciated businesses.

In this regard, :Fortrend stated in

pertinent part in a section of that brochure entitled "BUY

STOCK/SELL ASSETS TRANSACTION,

EXECUTIVE SUMMARY":

We are working with various clients who may be willing

to buy the stock from the seller and then cause the

target corporation to sell its net assets to the ultimate buyer.

These clients have certain tax attributes

that enabl-e them to absorb the tax gain inherent in the

assets.

In certain sitùations the economic cost of the client's

involvement is sufficiently low that a seller "of stock

can increase its after-tax sale proceeds, a buyer of

net assets can decrease its after-tax purchase price

(on a present value basis), and -the client can still

make an arbitrage profit.

As with any transaction, economic substance and proper

form are crucial to its success. Accordingly, in

transactions where involvement by such a client may

make sense, raising the idea at the earliest stages of

a transaction is advisable.

No one at Related had been familiar with Fortrend or had had

any contacts or dealings with it before Mr. Katz talked to a

representative of Related about Fortrend.

Mr.. Katz explained to

that representative that Fortrend had engaged in certain transac-

tions in which it had acquired the stock of a company and there-

- 10 -

after sold that acquired company's assets.

At no time did

Related review the Fortrend brochure or conduct any due diligence

review regarding Fortrend.

Around late March or early April 2000, Mr. Katz contacted a

representative of Fortrend on behalf of Related and met with that

representative..

Thereafter, representatives of Related intro-

duced representatives of Fortrend to representatives of the

Abrams estate ,for the purpose of discussing whether Fortrend

would be able to facilitate the .sale of certain assets of BCA to

Related in a manner that would satisfy the objectives of both

Related and the -Abrams estate .

Around late March or early April

2000, Related agreed to work with Fortrend with respect to

Related' s attempt to purchase certain assets of BCA.

Pursuant to the CFC engagement agreement, CFC Advisory

prepared an offering memorandum dated March 2000 for BCA (BCA

offering memorandum) .

That offering memorandum stated in perti-

nent part:

Executive Summary

Although the [Abrams] Estate owns 100% of the shares of

* * * [BCA] , the Company [BCA] has two compensation

plans which provide for employees to receive a 30%

interest in cash available for distributions and increases in the net worth of the Company [BCA] .

[BCA]

* * * stands prepared to consider inquiries that would

allow the [Abrams] Estate to liquify their investment

- 11 -

and would provide potential operating and capital

partners to the senior management team.

Company Form and Ownership

The senior management team and the employees do not own

stock. However, the Corporation [BCA] does have two

incentive compensation plans that provide for (1) employees to receive approximately 30% of the annual cash

available for distribution and (2) senior managers to

participate in the long-term growth of the Corporation's [BCA's] net worth.

The BCA offering -memorandum included (1) BCA's balance sheet

as of December 31, 1999, that showed total assets with a book

value of $7,636,225 and (2) BCA's projections of the cashflows

from the various real estate investments and real estate development projects that -it owned.

CFC Advisory and BCA considered the

development project known as the "Northwestern Project" and BCA's

50-percent ownership interest in Park Tower LLC to be two particularly significant assets of BCA.

On March 10, 2000, Mr. Brenner, Related's chief financial

officer, sent an email (Mr. Brenner's March 10, 2000 email) to

Mr. Blau, Related's president, with a copy to Mr. Ross, Related's

majority owner and chairman.

Mr. Brenner attached to that email

two spreadsheets regarding BCA that he had prepared on the basis

of certain available information."

One of those spreadsheets

"The record does not contain the two spreadsheets that Mr.

(continued...)

- 12 -

was a valuation summary of the operations and the revenues of BCA

and the other was a summary of BCA' s payroll .

Mr . Brenner

indicated in Mr. Brenner's March 10, 2000 email that he believed

that Related should submit a bid "in the range of $20-25 million

for a 70% interest in the [BCA] business."

Mr. Brenner also

indicated in that email that he and Mr. Blau would take responsibility -for "the negotiation of employment/ownership arrangements

with the -12 key employees . "

On March 22, 2000, Mr. Blau on behalf of Related sent a

letter (Related's March 22, 2000 offer letter) to .a representative of the Abrams estate in which Related offered to purchase

certain respective assets of 'the Abrams estate and BCA.

That

offer letter stated in pertinent part:

It is the intention of Purchaser [Related] and Seller

[the Abrams estate] to transfer to Purchaser, all direct

and indirect interests in all assets and/or entities

which provide revenue -to * * * [BCA] or. are described

in the Offering Memorandum for * * * [BCA] prepared by

[CFC Advisory] * * * During the Due Diligence Period,

Purchaser and Seller shall in good faith structure the

transaction in a tax efficient manner for both Purchaser and Seller.

In Related's March 22, 2000 offer letter, Related offered to

purchase from the Abrams estate for $25,500,000 certain of its

direct and indirect interests in BCA subject to certain adjust-

"(. . . continued)

Brenner attached to Mr. Brenner's March 10, 2000 email. Nor does

the record establish the period of time to which -those spreadsheets pertained.

- 13 -

ments to that purchase price based ont certain cashflows accruing

to BCA during the period January 1, 2000, sto the date on which

the purchase closed.

Of'the $25,500,000 purchase price, $24

million was to be distributed to the Abrams estate at the closing

and $1,500,000 was to be set aside for the purpose of paying

bonuses to those, employees of BCA who continued in-BCA's employ

for sixemonths after the closing.

On March 28, 2000, Steven-Sherman (Mr. Sherman)s, the chief

financial officer of BCA, sent a fax to Mr.'Brenner, the.chief

financial officer of Related.

10:. Sherman included with that fax

(1) BCA's respective consolidated balance,sheets as of December

31, 1998 and 1999, and (2) a list of the respective entities and

the respective assets that the Abrams estatemand-BCA owned as of

those two dates.

A draft.dated-March 31, 32000 (March 31, 2000 draft- response)

ofra letter dated "April

, 2000", "was prepared on behalf of the

Abrams estate in response to Relate'd's March 22, 2000 offer

"Related's March 22, 2000 offer -letter also indicated that

Related would arrange for debt and equity financing for the

development of certain land that BCA was to acquire on or before

May 31, 2000, and that was to be used for the Northwestern

project.

"The list of the entities-and the assets that BCA'owned as

of Dec. 31, 1999, showed BCA's resýective tax bases as of that

date in those entities and assets.

letter

In that draftaresponse,

the Abrams estate stated:

Structure.

For tax reasons, iteis essentiàl

that, the transaction be structured as a sale of the

stock of * * * [BCA] rather thantas a sale of assets.

At the closing, * * * [BCA's assets] would consist of

the assets and related liabilities described in the

Offering Memorandum dated March, 2000 that we have

provided to you. Assets of * * * [:BCA] that are not

described in the Offering Memorandum would be transoferred out of * * * [BCA] before closing and not be a

part of the transaction. * * *

Price. We propose that the purchase price be

$28 million plus the $1.5 millionethat you have offered

to place into a bonus pool for certain * * * [BCA]

employees. Net cash flows after January 1, 2000 from

assets that are part of the transaction would be deducted~from the $28 amillion, and a-credit for'taxes

that the Estate would owe'as * * * [BCA's] shareholder

for the portion of 2000 priorato the closings would be

added to the $28 million. * * *

Employee Matters.

It needs to be clear in

any transaction that they [sic] key employees have a

right to 30% of * * * [:BCA's] equity, subject to an

appropriate vesting schedule. * * *

At at time not disclosed by the record during~ the first six

months of 2000, certain of BCA's officers submitted to the Abrams

estate an offer ,to purchase for $16,500,000 the stock of BCA and

certain other business interests that the Abrams estate owned.

The Abrams estate rejected that offer because the purchase price

was too low.

In -response to the BCA offering memorandum, CFC Advisory

received on beha-lf of the Abrams estate four different proposals

The record does'not-establish whether the Abrams-estate sent a final version of the March 31, 2000 draft response to

Related.

- 15 to purchase that estate's BCA stock from Fortrend, JDL Development Corp., Lehman Brothers, and Vornado.

In those respective

proposals, Fortrend, JDL Development Corp., Lehman Brothers, and

Vornado proposed to pay $24.5 million," $26.5 million, $26

million, and $22 million, respectively, for the Abrams estate's

stock in BCA.

On April 18, 2000, CFC Advisory made a presenta-

tion with respect to those proposals to Ms. Abrams, Byron Canvasser, who was a director of BCA and Ms. Abrams' father, and

John Schmidt, an attorney with Mayer -Brown, who were the attorneys for the Abrams estate regarding the sale of BCA.

Fortrend's proposal" to purchase the stock of BCA from the

Abrams estate included a draft letter dated "April

, 2000".

That proposal letter stated in pertinent part:

The following is a summary of the basic business

terms upon which [FORTREND ENTITY] or an assignee

thereof (the "Purchaser"), would be willing to purchase

from The Estate of Bruce Abrams (the "Seller") one hundred percent (100%) of the capital stock (the "Stock")

of LR Development Company (a/k/a Bruce C. Abrams,

Inc.) ("LR Development").

[Bracketed material in original.]

"Fortrend's offer of $24.5 million was net of a $1.5 million payment that Fortrend proposed to set aside fo_r the purpose

of paying bonuses to certain BCA employees.

"The draft letter that Fortrend submitted in response to

the BCA offering memorandum identified a "FORTREND ENTITY", and

not Fortrend, as the purchaser of the BCA stock. Although

Fortrend did not purchase the BCA stock, for convenience we shall

sometimes refer to Fortrend as the purchaser of the BCA stock.

- 16 -

It is the intention of Purchaser to -acquire from

Seller and Seller to transfer to Purchaser all direct

and indirect interests in all assets and/oreentities

which are described in the Offering Memorandum ("Offering Memo") for LR Development prepared by Cohen Finan

cial, other, than those set forth on Schedule 4 hereto

(the "Excluded Assets") . * * *

s .

Purchase Price .

(a)

The aggregate purchase price ("Purchase

Price") for the Stock shall be an amount equal to:

(i)

Twenty Pou..e & Million Dollars

†$24-090-0-0-0†($26,000,000) * * *

(b)

The Purchase Price will be distributed as

follows:

(i)

Twenty--Two Four Million Five Hundred

Thousand Dollars - - †$·-2275&0-90-6t($24,500,000) * * * of the

Purchase Price will be distributed to

the, Seller at Closing; and

(ii) One Million Five Hundred Thousand Dollars ($1,500,000) will be placed into a

bonus pool for certain employees, of LR

Development, to be distributed six (6).

months after the Closing to such employees which continue to be employees at LR

Development at such time. * * *

Fortrend's proposal to purchase the stock of BCA from the

Abrams estate also included a draft letter dated "April

2000" from Mr. Blau, president of Related, to Byron Canvisseí$ a

director of BCA.

That draft letter stated in pertinent part:

- 17 It is our-understanding that you [BCA] have or

will be executing a letter of intent (the "Fortrend

Letter of Intent") with a client of Fortrend International or an af-f-i-1-i-ate assignee thereof ("Fortrend") to

sell to Fortrend one hundred percent (100%) of the capital stock of * * * [:BCA]. As you know, The Related

Companies, L.P. ("Related") is negotiating with Fortrend to purchase from Fortrend certain assets listed

on Schedule 1 hereto ("LR/Related Assets") currently

owned directly or indirectly by * * * [BCA]. * * *

Related intends to continue to develop, operate and

sell (if- applicable) the LR/Related Assets, to continue

to pursue development opportunities through Newco and

to have Newco employ current employees.of * * * []BCA].

(b)

Related shall have the right to approve

salaries, bonuses and other compensation or benefits

for all senior employees at Newco. Related intends to

establish at Closing an incentive compensation plan(s)

for certain employees of Newco to be determined by Related, pursuant to which thirty percent (30%) of the

equity interests in Newco shall be granted to such employees, which interests shall vest over a three-year

period and be subject to such other customary terms for

similar plans.

In addition, Related may elect to require that certain employees of Newco execute at Closing- employment agreements (including covenants-not-tocompete).

Around late April 2000, the Abrams estate agreed to sell to

Fortrend for $26 million all of the stock of BCA that the Abrams

estate owned.

Fortrend retained Manatt, Phelps & Phillips, LLP

(Manatt), as its attorneys regarding the purchase from the Abrams

estate of that estate's BCA stock and any sale by BCA of certain

of its assets.

Related retained Katten Muchin Zavis (Katten

Muchin) as its attorneys regarding any purchase by Related of

certain of BCA's assets.

- 18 -

OntMay 5, 2000, Mr. Kramer, a senior managing director of

Fortrend, esent to Mayer Brown, attorneys for the Abrams estate,

two copies of a ,letter of intent dated May 5, 2000 (May 5, 2000

letter .of intent) that a representative of Fortrend had executed.

In the May 5, 2000 letter of intent, Fortrend set forth the terms

under which 'Fortrend International,a LLC or an-assignee for client

thereof" offered to purchase from the Abrams estatë:all of the

stock of BCA.

In that letter of intent, Fortrend offered to pay

$25,128,000 to the Abrams estate for that stock and. to set aside

$1, 375, 000 from which Fortrend was to pay bonuses to "certain

employees of BCA who remained with BCA for six months after the

closing of the sale of the stock of , BCA. ,, On a date not disclosed

by the record, lvis. Abrams agreed to and signed the ,May. 5, 2000

letter -of intent on behalf of the Abrams estates.

During the period May through July 2000, respective representatives of the Abrams estate, Fortrend,. and Related and their

respective attorneys at Mayer Brown, Manatt, and Katten Muchin

negotiated the terms of an agreement for the purchase of the BCA

stock that the Abrams estate owned."

During the same period,

respective representatives of Related a'nd Fortrend "and their

respective attorneys at Katten Muchin and Manatt negotiated the

terms of an agreement for the purchase of certain of BCA's

"During the negotiations, the purchaser of the BCA stock

was not identified. As discussed below, around IJuly 20, 2000

Castanet, Inc., was identified as the purchaser of that stock.

- 19 -

assets.". BCA senior management did not participate in any

negotiations regarding the respective terms of the agreement for

the purchase of BCA's stock and the "agreement for the purchase of

certain of BCA's assets.

Before mid-July 2000, during, the respective negotiations

with respect to the purchase of BCA's stock and the purchase of

certain of BCA's assets, BCA and Related were aware -(1) that BCA

would realize a substantial gain on the sale of certain of its

assets,

(2) what the approximate amount of that gain would be,

and (3) that the assets that BCA was to retain after that sale

would have a fair market value of approximately $1 million.

no time did Related make any inquiry of Fortrend regarding the

gain that BCA was to realize as a result of the sale of certain

of its assets.

Nor did Related know or ask how BCA and/or

Fortrend planned to address any tax attributable to such a sale.

At no time did Related know, or inquire as to, what Forttend

intended to do with BCA after the sale of certain of BCA's

assets.

Fortrend and Related each spent three weeks in May 2000

conducting due diligence reviews with respect to BCA and the

assets that BCA owned.

Part of the due diligence review that

Related conducted addressed certain tax issues.

Related prepared

"During the negotiations, the purchaser of BCA's assets was

not identified. As discussed below, around July 24, 2000,

petitioner was identified as the purchaser of those assets.

20 -

a document dated May 4, 2000

and entitled "Tax Due ,Diligence

Issues" that contained a list of 28 «questions and, concerns- that

Related wanted to have addressed.

f ollowing questions:

5.-

Included in that list were the

Who will be doing appraisals/valuations/cost allocations of the various assets/properties for purposes of doing an IRC Section 1060 allocation? E

This is critical to this acquisition and needs to

be coordinated with Steven Ross' future income a

pro j ec t ions (AMT, e t c . ) s ince some leeway may' be

available re: inventory-type property (quick

write-offs) and real estate (slow write-offs).

Also, we need a breakdown between land (no áriteoffs) and other assets (such as goodwill and other

intangibles) . Also, are there any intangibles i

that can be wr itten of f over 15 years (e . g . , trade

names, goodwill, going corïcern, workforce in

place, covenants not to compete, etc . ) ? Also, are

there any self-constructed assets that can be

written off over a short period (e.g., plans, workprocesses, blue print library, etc.)?

On June 5, 2000, Mr. Blau

Related's president

sent to

respective representatives of , inter alia, Fortrend, - BCA

and the

Abrams estate a report. concerning Related' s due diligence review

with respect to BCA and its assets that Rubin & Katz had prepared

(Rubin & Katz due diligence report) on behalf of Related.

In"

that due .diligence report, Rubin & Katz set forth (1) its finds

ings with respect to the amount of the revenues that it projected

Related.would generate from each of the assets that Related

proposed to purchase from BCA ind (2) the differences between

those projections and the projections that CFC Advisory had made

on behalf of BCA and that were set forth in the BCA offering ,

- 21 -

memorandum .

On June 6 , 20 0 0 , Mr . A Blau provided to Mr . Kramer

additional information regardina the Rubin & Katz due diligence

report.

In anticipation that the respective negotiations regarding

the purchase of BCA's stock from the Abrams estate and the

purchase of certain of BCA's assets from BCA would be successful,

certain- actionsswere taken

Related not only wanted to purchase th ough a new entity to

be formed (purchasing new -entity) certain assets of »BCA, it also

wanted certain members of BCA's management'to continue to manage,

as employees of that new entity, thiaassets purchased.

Cónse--

quently, around April 2000 Related offered to BCA senior management 30 percent of the ~equity interests in that new entity

provided that BCA senior management agreed to be employees of the

purchasing new entity and to continue managing as such the dayto-day operations tof the assets of BCA that that entity -was to

purchase.

After negotiations with respect to that offer, BCA

senior management agreed to those terms.

In order to facilitate

that agreement, BCA senior management, except Kenneth Rice (Mr.

Rice),

formed on July 19,

Delaware l,ae.

2000, LRD,Group LLC (LRD Group)

under

BCA senior management, except Mr. Rice, owried all

of the interests in LRD Group.

On July 12, 2000, petitioner wås formed under Delaware law

to be the purchasing new entity.

As of July, 31, 2000, LRD Group

- 22 -

and Related LR Development LLC (Related LR) " owned 30~ percent

and 70 percent, respectively, of the interests in petitioner

On July 13, 2000, Castanet, Inc.

rated under,Delaware law.

(Castanet), was incorpo-

Around July -14, 2000, the incorporator

elected,Alice Dill (Ms. Dill),.an employee of Fortrend,- as the

sole:director of Castanet.

On July -14, 2000, Ms. Dill, as the-

sole director of Castanet, elected herself president, secretary,

and treasurer of that company.

On July-14i. 2000, Castanet sold and issued to Cronulla Corp.

(Cronulla) and Signal Capital Associates -L.P.

(SCALP)? 95 per-

cent and 5 percent, respectively, of itsscommon stock.

On July

16, 2000, Cronulla sold to SCALP its 95-percent common stockinterest in Castanet.

As a result, SCALP owned all of the stock

of Castanet.

On July 20,, 2000, Mr. Bae, an employee of Fortrend, sent.a

memorandum to Fortrend's at.torneys at,Manatt with respect tou

Castanet's purchase of the stock of BCA from the -Abrams estate.

That memorandum stated in pertinent part:

"As of July 31, 2000, Related and Yukon Holdinge LLC owned

90 percent and 10 percent, respectively, of the interests in

Related LR. Mr. Blau, Related's president, was a member of Yukon

Holdings LLC. Related LR did not own any interest in LRD

pup.

"During.2000, Mr. Furman, a 50 percent.owner of Fortrend,

owned 100 percent of the general partnership interests and 70.79

percent ,of the total interests in SCALP. During 2000, Mrg

Forster, a 50-percent owner of Fortrend, owned 9.5 percent of the

total interests in SCALP.

- 23 -

Transactional Summary & Closing Sequence

As you are aware, it is imperative that we provide

Fred Forster [the owner of 50 percent of the interests in Fortrend and 9.5 percent of the interests in SCALP] with a copy of the transactional

summary & closing sequence, so that Fred and

Howard Teig [Fortrend's outside accountant] can

determine the ownership structure of Castanet,

Inc. and appropriate solutions to shelter the

gains in the subject transaction [the sale of certain of BCA's assets].

On July 21

2000, Mr. Bae sent a fax (July 21, 2000 fax) to

Don Fitzgerald (Mr. Fitzgerald), an attorney at Manatt, with

respect to Fortrend's intention to contribut-e certain Canadian

currency with a high basis and a low value to BCA following

Castanet's purchase of BCA's stock and BCA's sale of certain of

its assets.

In that fax, Mr. Bae stated in pertinent part:

Annexed hereto is a copy of the flow chart, illustrating the buying entity structure. Upon our acquisition

of * * * [BCA] & disposition of certain assets [of BCA]

* * * we are contemplating contributing certain Canadian currencies, which * * * will flow down to Castanet, Inc.

Please review the enclosed and advise me whether the

contemplated sheltering plan is bona fide.

Also, what are the possible tax

liabilities/ramifications which may arise from making

the contribution after or before the merging of Percussion, LLC into Castanet, Inc.?

Lastly, is Manatt Phelps comfortable in providing a tax

opinion with regard to this proposed post-closing

contribution?

Around July 21, 2000, Mr. Fitzgerald made certain handwritten notations on the July 21, 2000 fax.

Near Mr. Bae's request

--24 -

for advice with respect to "whether the contemplated sheltering

plan is bona- f ide" , Mr . Fit zgerald wrote "351 + basis only" .

addition; Mr. Fitzgerald wrote the following at the bottom of the

July 21, 2000 fax: . "Discussed with Randy [Bae]ssequencing of the

downstream merger of Castanet into LR {BCA) to precede contribution of the high basis/low value assets."

Castanet borrowed $28 million (UAFC loan) from UtrechtAmerican Finance Co.

(UAFC) , an affiliate of Cooperatieve

Centrale Raif feisen-Boerenleenbank, B.A.

(Rabobank) .

Castanet

intended to use most-of that loan to purchase the stock of BCA

that the Abrams estate owned.

Related LR borrowed $33 million from Bayerische Hypo-und

Vereinsbank AG (Hypo Bank) in order, inter alia, to finance

petitioner' s purchase of certain of iBCA' s assets .

That loan was

evidenced by a document dated July 31, 2000, and entitled "CREDIT

AGREEMENT"

(Hypo Bank.credit agreement) .

On July 26, 2000,

before executing the Hypo-Bank credit agreement, Hypo Bankreceived a memorandum from Richard O'Toole (Mr. O'Toole)

attorney with Paul, Hastings, Janofsky & Walker LLP, the attorneys representing Related and its affiliates with respect to the

purchase of certain of BCA's assets.

In that memorandum, Mr.

O' Toole stated:

In the process of preparing for this acquisition

[of certain of BCA' s assets] , the Purchaser [petitioner] has asked for our advice as to whether, for

federal income tax purposes, the form of these transac-

- 25 -

tions will be respected - i.e., whether the sale of

stock in the Company [BCA] from the [Abrams] Estate to

Castanet, on the one hand,.and thë sale of assets from

the Company [BCA] to the Purchaser [petitioner] , on the

other hand, will be treated as independent transactions

and not recharacterized by the Internal Revenue Service. We have advised the Purchaser [petitioner] that

we believe the correct tax treatment of these events is

that each sale should be respected as an independent

transaction. We based our advice on (a) the form of

the transactions, (b) the fact that Castanet and its

owners and the Purchaser [petitioner] and its owners

are unrelated parties;- (c) each of the parties to these

transactions will report the transactions in a manner

consistent with their form, (d) Castanet is expected to

derive a profit from these transactions and (e) the

Purchaser [petitioner] is not acquiring all of the assets held by the Company.

On July 31, 2000, Castanet, Related LR, petitioner, Hypo

Bank, Near North Title Insurance Co.

(Near North), Rabobank, and

UAFC executed a document entitled "ESCROW AGREEMENT"

agreement).

(escrow

BCA was not a party to that agreement.

Pursuant to the escrow agreement, Near North was named

escrow agent and Rabobank was named subescrow agent in connection

with (1) the Abrams estate's sale of its BCA stock to Castanet

and (2) BCA's sale of certain of its assets to petitioner.

escrow agreement provided in pertinent part:

RECITALS

It is contemplated under the Stock Purchase

Agreement [the agreement for the purchase of BCA's

stock] that Castanet will pay or cause to be paid

$25,410,295 net of proceeds and adjustments (the "Stock

Purchase Price") to the [Abrams] Estate on the date

hereof.

The

26 -

D. . It 'is contemplated under the Asset Purchase

Agreement [the agreement for the purchase of certain of

BCA' s assets]- that Purchaser [petitioner] will pay or

cause to be paid $25, 779, 369 net of proceeds and adjustments (the "Asset Purchase Price") to Castanet on

the date hereof.

Hypo Bank shall deposit- the Asset Purchase

Price into an escrow account held by Sub-Escrow Agent

[Rabobank] (such amount to be referred ¯Eo herein as the

"Asset Purchase Escrow Amount") .

The Sub-Escrow Agent [Rabobank] will hold the

Asset Purchase Escrow Amount in * * * Castanet Purchase

Escrow Account I, Account -No. * * * 9107 * * * (the

"Asset Purchase Escrow Account") .

UFAC [sic] shall deposit the Stock Purchase

Price into an escrow account held by Sub-Escrow Agent

[Rabobank] (such amount to be referred to herein as the

"Stock Purchase Escrow Amount" * * *) .

The Sub-Escrow Agent [11abobank] will hold the

Stock Purchase Escrów Amount in * * * Castanet Purchase

Escrow Account II, Account No. * * * 9116 * * * (the

"Stock Purchase Escrow Account").

AGREEMENT

2. .

Deposits and Establishment of the Escrow Fund.

"The escrow agreement required Hypo Bank on behalf of

petitioner to deposit with the escrow agent Rabobank the funds

representing the price that petitioner agreed (as discussed

below)' to pay to purchase certain of BCA' s asset's . That agreement required Rabobank to credit those funds to Castanet's

account No. 9107 maintained at Rabobank. For convenience, we

shall discuss Hypo Bank' s and/or petitioner' s deposit of the

funds representing the price that petitioner agreed to pay- to

purchase certain of BCA's assets as being a deposit of those

funds into that account of Castanet.

- 27 -

(b)

Pursuant to the Credit Agreement [between

Hypo Bank and Related LR dated July 31, 2000], Hypo

Bank shall deliver to the Sub-Escrow agent [Rabobank]

the Asset Purchase Escrow Amount on the date hereof.

The Sub-Escrow Agent (Rabobank] shall hold the Asset

Purchase Escrow Amount and all interest and other amounts earned thereon * * * in escrow pursuant to this

Agreement, in the Asset Purchase Escrow Account.

(c)

Pursuant to the Stock Purchase Agreement,

UAFC sha-ll deliver, or cause to be delivered, to the

Sub-Escrow Agent [Rabobank] the'Stock Purchase Escrow

Amount on the date hereof. The Sub-Escrow Agent [Rabobank] shall hold the Stock Purchase Amount and all

interest and other amounts earned thereon * * * in

escrow pursuant to this Agreement, in the Stock Purchase Escrow Account.

Payments from the Stock Purchase Escrow Fund.

* * * Sub-Escrow Agent [Rabobank] shall pay to (a) the

[Abrams] Estate an amount equal to $23,202,795 by wire

transfer * * * and (b) to Escrow Agent [Near North] an

amount equal to $2,207,500 * * * by wire -transfer * * *

- 5.

Payments from the Asset Purchase Escrow Fund.

(a)

If and only if (i) the Sub-Escrow Agent [Rabobank] has received the Release Notice and (ii) the

Sub-Escrow Agent [Rabobank] has previously made the

wire transfers described in the first sentence of Section 4 above, then Sub-Escrow Agent [Rabobank] shall

pay (A) to UAFC on behalf of and for the account of

Castanet, that portion of the Asset Purchase Escrow

Amount 'equal to -the amount owed to UAFC by Castanet,

and (B) all other amounts in the Asset Purchase Escrow

Account, if any, to Castanet or to such other Person as

directed by Castanet.

Under the escrow agreement,

(1) petitioner was required to

pay the funds representing the price that petitioner was to pay

to purchase BCA's assets into an escrow account of Castanet at

Rabobank that Castanet controlled,

(2) petitioner was not re-

- 28 -

quired to. pay those funds into an account that BCA -controlled,

and (3) those funds were required to be used to repay Castanet's

debt to UAFC.P

BCA had no right under the escrow agreement to

receive and/or to control those funds.

In late July 2000, the respective negotiations regarding the

purchase of BCA's stock and the purchase of BCA's assets, as well

as the actions taken -in anticipation of the success of those

negotiations, were successfully completed.

On July 31, 2000,

Castanet and the Abrams estate executed a document entitled

"STOCK PURCHASE AGREEMENT"

(SPA) under which the Abrams estate;

agreed to sell and Castanet agreed to buy all of the stock of BCA

that the Abrams estate owned for $25,410,295.

The SPA..provided

in pertinent part:

This Stock Purchase Agreement (this "Agreement") ,

dated as of July 31, 2000 (the "Closing Date") , is

-be tween Cas tanet , Inc . , a Delaware corporation

("Buyer") , and The Estate of Bruce C. Abrams (thea a

"Seller") .

a *

, *

1.2 PURCHASE PRICE. The purchase price for the

Shares, is $25,410,295 payable in cash by wire transfer

as designated by Seller.

22UAFC lent Castanet $28 million, which was more than the

price that petitioner was to pay for certain of BCA' s assets .

Nonetheless, for convenience we shall sometimes state that the

funds representing that price were used to repay the UAFC loan or

the debt to UAFC.

- 29 1.4

PURCHASE PRICE-ADJUSTMENTS

(a)

An estimate of the income tax benefit

available. to Seller (the "Estimated Tax Benefit") for

the period from January 1, 2000 through July 31, 200Ø

(the "2000 Period"), based upon the taxable income or

taxable losses of the LR Entities (excluding the Excluded Assets) for the 2000 Period, has been computed

by the Seller and agreed upon by the Buyer, and such

Estimated Tax Benefit is $429,000 (the "Estimated Tax

Benefit"). An estimate of the Replacement Tax due by

Seller for the LR Entities for the period beginning

January 1, 2000 through and including the Closing Date

has been computed by Seller and agreed upon by the Buyer, and such Replacement Tax is $75,000 (the "Estimated

Replacement Tax"). The Seller shall deposit the sum of

the amounts of the Estimated Tax Benefit and the Estimated.Replacement Tax ($5O4,000) into escrow pursuant

to the Escrow Agreement (the "Tax Escrow Deposit").

(b)

To the extent the Tax Returns prepared

by Seller in accordance with Section 5 (the "Final Tax

Returns") show: (i) the amount of income tax benefit

available to Seller based upon the actual tax losses of

the LR Entities (excluding the Excluded Assets) for the

period from.January 1, 2000 through the Closing Date

(the "Short Period") which is greater than the Estimated Tax Benefit, the Seller shall pay Buyer an amount

equal to the difference between the amount of income

tax benefit available to Seller based upon the actual

tax losses of the LR Entities (excluding the Excluded

Assets) as determined from.the Final tax Returns for

the Short-Period and the Estimated Tax Benefit and the

parties shall instruct the Escrow agent to pay the full

amount of the Estimated Tax Benefit, including any interest or other earnings earned on the Estimated Tax

Benefit deposited by Seller pursuant to the Escrow

Agreement, to-Buyer, (ii) the amount of income tax

benefit available to Seller based upon the actual tax

losses of the LR Entities (excluding the Excluded Assets) for Short Period which is less than the Estimated

Tax Benefit, the parties shall instruct the. Escrow

Agent to pay to Seller a portion of the Estimated Tax

Benefit.'equal to the difference between the amount of

such income tax benefit available to Seller based upon

the actual tax losses·of the LR Entities (excluding the

Excluded Assets) as determined from the Final Tax

Returns for the Short Period and the Estimated Tax

- 30 -

Benefit and instruct the Escrow Agent to pay the remainder of the Estimated Tax Benefit, if any, to Buyer,

(iii) income tax due by Seller based upon the actual

taxable income of the LR Entities (excluding the Excluded Assets) for the Short Period, the parties shall

instruct the Escrow Agent to pay the full amount of the

Estimated Tax Benefit, including any interest or other

earnings earned on the Estimated Tax Benefit deposited

by Seller pursuant to the Escrow Agreement, to Seller

and the Buyer shall pay to .the Seller án amount equal

to the income tax due by Seller on the actual taxable

income of the LR Entities (excluding the Excluded Assets) for the Short Period as determined from the Final

.Tax Returns .

REPRESENTATIONS AND WARRANTIES OF SELLER.

Seller represents and warrants to Buyer as follows:

2.10 TAXES.

(a) - For the purposes of this "Agreement,

"Tax" or "Taxes" refers to any and all federal, state,

local and foreign taxes, assessments and other governmental charges, duties, impositions and liabilities

relating to taxes, .including, but not limited to, taxes

based upon or measured by-gross receipts, income, profits, sales, use and occupation, and value -added, ad

valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed

with respect to such amounts and any obligations under

any agreements or arrangements with any .other Person with respect to such amounts and including any liability for taxes .of a predecessor entity.

(b)

Each of the LR Ent'ities have . timely s

filed, taking into account any extensions, all federal,

state, local and foreign returns, estimates, information statements and reports ("Tax Returns") relating to

Taxes required to be filed by the LR Entities. All

such Tax Returns are true and correct in all material

respects. With respect to all Taxes imposed on the LR

- 31

Entities or any of the Subsidiaries or sfor which the LR

Entities or any of the Subsidiaries is or could be liable, whether to taxing authorities or to other Persons

or entities (as, for example, under tax sharing or tax

allocation agreements), with respect to all taxable

periods or portions of periods ending on or before the

Closing Date, all applicable laws and agreements have

been fully complied with, and all material Taxes required to be paid by the LR Entities or any of the Subsidiaries to taxing authorities or.others on or before

the date hereof have been paid. All Taxes required to

be paid as of the Closing Date will be paid.

4.7

TAX INDEMNIFICATION.

(a) Subject to the terms and conditions

hereof, :ba the event of a Sale Event which results in a

Seller Loss, the Seller shall give to the Buyer written

notice of such loss in accordance with this Agreement,

and the Buyer shall be obligated to make a payment to

Seller as provided in this Agreement (an "Indemnity

Payment"). Buyer's obligations under Sections 4.7, 4.8

and 4.9 shall survive the Closing until all applicable

statutes of-limitation with respect to all Tax Returns

have elapsed.

(b)

If the Buyer shall be obligated to make

a payment to. Seller hereunder, the Buyer shall satisfy

such obligation by making a payment to the Seller in an

amount equal to the Seller Loss plus, to the extent not

previously paid, the costs and expenses to be borne by

Buyer pursuant to Section 4.8(b).

made in accordance with the terms hereof shall be made

no later than 30 days following the receipt by Buyer of

a written demand therefor describing in reasonable detail:

(i) the Sale Event and (ii) the amount of the

Seller Loss, which demand shall be made no later than

35 days before the due date for payment by the Seller

of the Seller Loss; provided however, with respect to

any Seller Loss that is being contested pursuant to

this Agreement, no Indemnity Payment shall be due until

30 days after a Final Determination with respect to

such contest.

- 32 4.8

TAX CONTESTS.

(a) Notice i In the event any taxing authority -(i) delivers to Seller any written notices, notifications, audit letters, letters.of inquiry or any other

written communication thattreasonably-may result in a

Seller Loss or (ii) proposes an adjustment to the tax

liability of the Seller or any of the LR Entities,

which adjustment, if sustained, could result in an obligation on the part of the Buyer to indemnify the

Seller for a Seller Loss, ethe recipient of Sueh notice

(whether it be the Buyer-or the Seller) shall promptly

upon receipt of notice of such audit or inquiry notify

the Seller (if the Buyer is the recipient), or the Buyer (if the Seller is the recipient), in writing, of

such proposed adjustment and of-any'action taken or

proposed to be taken by any taxing authority with respect thereto and the Seller, for at least thirty.(30)

days after receivingssuch notice from any.taxing authority, shall forbear, if such forbearance is permitted by law, from the payment of any Taxes (including

interest, penalties and additions to Taxes) asserted to

be payable as a result of such proposed adjustment.

The recipient shall include with such notification a

true, corr.ect, and complete copy of any written communication with any taxing authority, and an accurate and

complete summary of any oral communication with such

taxing authority.

(b) Administrative and Judicial Proceedings.

Unless otherwise instructed by the Buyer, the Seller

agrees to diligently contest any proceeding relating to

Taxes with any taxing authority relating to any Sale

Event; and the Seller shall keep the Buyer promptly and

fully informed of the progress of such contest and

shall, if and to the extent requested, permit Buyer to

attend any and all conferences with the contesting.authority; and consider in good faith any and all advice

rendered by the Buyer with respect to the conduct of

such contest.

On written request of the Buyer made -

within thirty (30) days of the.receipt of notice of a

proposed adjustment, the Buyer shall have the opportunity to be present at and participate in any -administrative or judicial proceedings (to the extent permitted by law) relating to Taxes with any taxing authority

relating to any Sale Event,' but only if (i) the Seller shall have been provided with a written request by the

Buyer for the Seller to jointly contest the adjustment

- 33 -

in accordance with this Agreement; (ii) the proposed

adjustment is in excess of $50,000; and (iii) the Buyer

agrees to bear all of its costs and disbursements associated with such contest.

In connection with any

contest relating to any Sale Event, the Buyer agrees to

pay on demand on an after-tax basis all reasonable outof-pocket costs and expenses (including, without limitation, reasonable attorney fees and costs) which the

Seller may incur in connection with contesting such

claim. The Buyer shall determine the nature of àll action to be taken to contest such proposed adjustment

* * *. Buyer shall- be afforded the opportunity to review and comment on in advance all material submissions

relating to any potential Seller Loss.

In the event

that Seller does not adhere to Buyer's directions in

any material respect -with respect to the conduct of

contesting such claim, Buyer shall not be obligated to

make.any Indemnity Payment.

* * * *

(c)

Settlement.

If, in the course of contesting any claim referred to in this Agreement, any

taxing authority shall advise the Seller or the Buyer

that it is willing to agree to a settlement of such

claim, such party shall notify the other party of such

settlement proposal.

If, after receipt of such notice,

the Buyer so requests, the Seller shall agree to- the

settlement as proposed by such taxing authority and

described to the Buyer.

(d)

Payment.

If the Buyer or Seller shall

have contested any proposed adjustment as above provided, the Buyer shall not be required to indemnify the

Seller pursuant to this Agreement with respect to the

claim being contested until there occurs a Final Determination with respect to the-liability of the Seller

for the Seller Loss.

If the Buyer shall direct the

Seller to contest a proposed adjustment that could result in a Seller Loss by paying the tax claimed (including such other amounts payable as -interest, penalties, or additions to tax) and seeking a refund, then

the Buyer shall advance to the Seller, on an interestfree basis, the aggregate amount of such taxes, interest, penalties and additions to tax applicable to such

proposed adjustment (and shall indemnify the Seller in

accordance with this Agreement from any adverse consequences of such advance), and the Seller shall not be

obligated to take any further action pursuant to this

Agreement unless Buyer shall make such advance. * * *

34 4.9

MISCELLANEOUS TAK MATTERS.

(a) Adiustment to Purchase Price. The

amount of . any Indemnity Payment under this Agreement a

shall be treated by the Seller and Buyer as an adjustment to the Purchase 'Price.

(b) Assumption of Indemnity Obl'igation.

Buyer sells all or any substantial portion of the ase

sets of ,the LR Entities, as a condition to such sale*¡

the purchaser(s) of suc.he assets (or an affiliate

thereof) (the "Subsequent Buyer") shall be required to

e assume the 'indemnity obligations and the liabilsity for

Taxes provided for in Section 4 7. (subject to Section

4.8) of this Agreement and in Section 5 of this Agreement and- shall be required to meet the following liquidity and other requirementsi

(i) provide a $3smillion letter of credit in form and substance reasonably

acceptable to Seller which shall allow the Seller to

draw down upon the letter of credit during the Reserve

Period in the event that an Indemnity Payment is due in

accordance with the Agreement and has not been made;

* * * In the event of a sale whereby the Subsequent .

Buyer assumes the Buyer' s. indemnity obligations under

the Agreement, Buyer shaall no longer be liable for such

indemnity-obligations and the Person assuming such in

demnity obligations shall be entitled to all provisions

of Sections 4.7,

4.8 and 4.9.

- (c)

Consistent Tax Reporting Position.

Seller and .Buyer shall reflect the sale of the Shares

as a sale of stock or other ownership interests consistent with the terms of this. Agreement for, all Tax and

other filing and reporting purposes without any disclo

sure pursuant to Section 6662 or 6111 of the Code.

* * *

LIABILITY FOR TAXES.

(a)

Except for 'Taxes that have been provided

for as accrued in the computation ofe Net Working Capital and except as set forth in Section 4.7, Seller

shall be responsible for all Taxes imposed on the LR

Entities (the "Seller Taxes"), for all taxable periods or- portions of taxable periods, ending as of one day

prior to the Closing Date (thé "Pre-Closing Period") .

- 35 Buyer shall be responsible for all Taxes imposed on the

LR -Entities (the "Buyer Taxes") for all taxable periods

or portions of taxable periods beginning on the Closing

Date (the "Post-Closing Period").

(b)

Seller shall cause its. accountants,

American Express Tax and Business Services Inc. or such

other accountants selected by Seller, to prepare the

Tax Returns required to be filed by the LR Entities for

all -Pre-Closing Periods.

* * * Items to be taken into

account for the taxable year beginning on January.1,

2000 and ending as of one date prior to the Closingt

Date (the "Pre-Closing Short Period") shall be determined using the "closing-the-books",method as described

in Section 1362(e) (3) of the Code and the regulations

thereunder, and the Buyer- and Seller agree to make an

election, if necessary, under Section 1362(e) (3) of the

Code.

(c)

Consistent with the "closing-thelbooks"

method under Section 1362(e) (3) of the Code, Seller

shall be responsible far all Seller Taxes 'attributable

to the Pre-Closing Short Period (except to the extent

such Taxes have been provided for as accrued in the

computation of Net Working Capital and except as provided in Section 4.7). * * * Except as set forth in

Section 4.7, Seller shall indemnify and hold Buyer

harmless from and against all,liability from Seller

Taxes attributable for the Pre-Closing Period to the

extent such Taxes have not been paid or an accrual

therefor has not been included in Net-Working Capital.

(f)

If Buyer or any of the LR Entities receives a refund, credit or reduction of Taxes attributable to the Pre-Closing Period, Buyer shall promptly

reimburse the Seller for such refund, credit or reduction of Taxes.

If Seller or any of the LR Entities receive a refund or reduction of Taxes attributable to

the Post-Closing Period, the Seller shall promptly

reimburse the Buyer for such refund, 'credit or reduction of taxes.

(g)

The Buyer and LR Entities shall cause

their accountants to prepare and file all Tax Returns

required to [be] filed by LR Entities for the taxable

year beginning on the Closing Date (the "Post-Closing

-,36 Short Period") and all subsequent tax years. Such Tax

Returns.shall be prepared on a basis donsistent with

the items and positions reflected-in the Pre-Closing

Period Tax Returns and in this Agreement; provided,

however, that to the extent Buyer is entitled to make

new tax -elections,, adopt methods-of accounting other

than those used by Seller or take reporting positions

different from those taken by Seller, it may do so, so

long as such items and positions couldenot reasonably

lxa expected to cause any material adverse tax consequences to Seller with respect to the Pre-Closing Period. Items to be taken into account in the Post-Cldsing Short Period Tax Returns shall be determined usina

the "closing-the-books" method as described in Section

1362(e) (3) of the Code and the regulations thereunder,

and the Buyer and Seller<agree to make an election,« if

necessary, under Section 1362 (e) (3) of the Code.

(h)

Consistent with the "closing-the-books"

method under Section 1362 (e) (3) of the Code, Buyer

shall be responsible for all Buyer Taxes for all taxable periods or portions of taxable periods beginning

on the Closing Date (the "PostrClosing Period").- Ex2

emptions, allowances, deductions and any other items

that are calculated on an annualsbasis (including, but

not limited to, depreciation and amortization deduc

tions) shall be allocated between the Pre-Closing Short

Period and the Post-Closing Short Period in the proportion which the number of days in each such period bears

to the total number of days in the applicable annual

period.

If,.as of the Closing Date,'any of the LR Entities is a partner in a partnership which has a tax

year that does not end as of the Closing Date, any item

attributable to such partnership's activities shall be

allocated among the Pre-Closing Short Period and the

Post-Closing Short Period in a manner consistent with

Treasury Regulation Section 1.1362-3(c).

In addition

to any obligation to Seller under Section 4.7, Buyer,

shall indemnify and hold Seller harmless from and

against all liability from Buyer Taxes attributable to

the Post-Closing Period, and for.all, Taxes attributable

to the Pre-Closing Period which have been provided.for

as accrued in computation of Net Working Capital.

(i)

Any refund of Taxes, credit or reduction of

Taxes attributable to the Post-Closing Short.Period and

all subsequent periods will be for the benefit,of

Buyer.

- 37 -

DEFINITIONS. For purposes of this Agreement,

the following terms have the meanings specified:

"Excluded Assets" - means all the direct and

indirect interest of * * * [BCA] in 3169 N; Lincoln

Corp., 3830-32 Lincoln Joint Venture, Dearborn & Elm

LLC, N.B.A.L. LLC, St. Benedicts Hotel, LLC, 310 N.

Michigan, LLC, Vision AHC, LLC and Vision Capital, LLC,

and each of the foregoing entities respective hold-ings .

"Replacement Tax" - means the Illinois Personal

Property Replacement tax due by the - Company for the

Pre-Closing Period.

"Sale Event" - shall mean the sale of all or a

substantial portion of the assets of the LR Entities by

the Buyer within six months after the Closing that

results in any taxing authority assessing or imposing

any additional Tax against Seller either as a direct or

indirect result of the sale of such assets.

* -

"Seller Loss" - shall mean the amount, if any, of

Taxes owed by Seller (including, without limitation,

Taxes resulting from the receipt of any Indemnity

Payment) to any taxing authority in excess of the

amount of Taxes owed to any taxing authority by the

Seller with respect to the sale of the Shares, which

amount arises from a Sale- Event * * *

"On July 31, 2000, before Castanet and the Abrams estate

executed the SPA, the board of directors of BCA adopted resolutions declaring a dividend payable to the Abrams estate consisting of the assets that were defined as "Excluded Assets" in

section 6 of the SPA.

- 38 -

Pursuant to the SPA, the Abrams estate sold to Castanet all

of the stock of BCA that the Abrams estate owned.

Under section

5 of the SPA, Castanet expressly agreed to be responsible for,

inter alia, all taxes imposed on BCA for taxable years endingafter the closing of the SPA, including any tax attributable to

any sale of certain of BCA's assets.

Under section 4.9('b) of the

SPA, any purchaser of all or a substantial part of BCA's assets

was required to assume, inter alia, the taxes.for which Castanet

agreed to be responsible under section 5 of that agreement.

Effective as of the closing on July 31, 2000, of-the Abrams

estate's sale of its BCA stock to Castanet,

(1) Byron Canvasser,

Robert Canvasser, and Andrew Hochberg resigned as directors of

BCA,

(2) BCA senior management, Mr. Kirshenbaum,' and certain

other executives of BCA resigned their positions with BCA,f4 and

(3) Castanet, as the sole stockholder of BCA, elected Ms. Dill as

the sole director of BCA.

On July 31, 2000, Ms. Dill, as the

sole director of BCA, elected herself president, secretary, and

treasurer of that company.

On July 31, 2000, petitioner, Castanet, and BCA executed a

document entitled "ASSET PURCHASE AGREEMENT"

(APA) under ,which

BCA agreed to sell and petitioner agreed to buy substantially all

440n July 31, 2000, each member of BCA senior managethent,

except Mr. Rice, executed an employment agreement with LR Management Co., a company 100 percent of the stock of which petitioner

owned.

- 39 -

of BCA's assets.

The APA provided in pertinent part:

This Asset Purchase Agreement (this "Agreement") ,

dated as of July 3¯1, 2000, is between LR Development

Company LLC, * * * ("Buyer"), Castanet, Inc., a Delaware corporation, (the "Seller") and Bruce C. Abrams,

Inc., an Illinois cor]boration, * * * (the "Company").

* * *

SALE AND TRANSFER OF ASSETS; CLOSING

1.1

ASSETS AND A$SUMED LIABILITIES.

(a)

Subject to the terms and conditions of this

Agreement, at the Closing the Seller will, or will

cause the Company to * * * sell, transfer, convey,

assign and deliver to Buyer * * * all of the right,

title, and interest in and to certain assets described

in this Section 1.1(a) that are owned by the Seller or

the Company (as applicable) as of the Closing Date

* * * including, but not limited to, the following:

(i)

the equity interests described on Exhibit 1.1-A attached hereto (collectively, the "Equity

Interests" ) ;

(ii) all Proprietary Rights of the Company;

(iii) the rights of Seller from and after the

Closing Date under the Stock Purchase Agreement and

rights of Seller under the Escrow Agreement established

in accordance with Section 1.4 of the Stock Purchase

Agreement;

(b) Notwithstanding the foregoing, the following

properties and assets of the Company are retained by

the Company and are expressly excluded from the purchase and sale contemplated by this Agreement (collectively, the "Excluded Assets"):

(iii) the entities set forth on Exhibit 1.1-B

(the "Excluded Entities"); and

- 40 -

(iv) those items identified or described in

Section 1.1(a) above, to the extent said items relate

.solely -to the Excluded Entities.

(c·)

Assumed and Excluded Liabilities

Ascof the Closing Date, Buyer will assume and

thereafter pay and fully satisfy when due: (A) liabilities arising after the Closing Date under the Applicable Contracts to which the Company is a party or by

which the Company is bound or Governmental Authorizations held by the Company and assumed by Buyet pursmant

to paragraph (a) of this section 1.1, ()B) normal and

customary trade accounts payable mand accruals (other

than income tax accruals) of the Company, in each case

arising in the Ordinary Course of Businessaand only to

the extent included in the calculation of Net.Working

Capital (the "Accounts Payable"), and (C) liabilities

and obligations of the LR Entities. All such liabilities and obligations to be so assumed by Buyer are

referred to, herein as the "Assumed Obligations". Assumed Obligations shall not include (x) any of the

-items described in subparagraph 1. 1 (c) (A) , (B) , or" (C)

which relate to the Excluded Assets, or (y) any taxes

of Seller or the Company of any ,nature due as a result

of the purchase of the Shares by Seller, the sale of ,

the Assets to Buyer, or the sale of the Excluded Assets

by the Company.

1.2

PURCHASE PRICE.

(a)

The purchase price (ther "Purchase ,Price") for

the Assets shall be Twentys Five Million Six Hundred

Thirteen Thousand Three Hundred sixty Nine and No/100

Dollars ($25,613,369),"" payable in cash payable [sic]

pursuant to the terms and provisions of the Escrow

Agreement between Buyer, Seller and escrow agent.

(b)- Exhibit 1.2 of this Agreement sets forth the

allocation of (i) the Purchase Price, plus the (ii) al-

"Section 1.2(a) of the APA provided that petitioner was to

pay $25,613,369 for certain of BCA's assets. Recital D of the

escrow agreement provided that petitioner was to pay "$25,779,369

net of proceeds and adjustments" for certain of BCA's assets.

The 'record does not establish the amount of the "proceeds and

adjustments" that was to reduce that $25,779,369.

- 41 locable liabilities being assumed directly or indirectly by Buyer. The Seller and Buyer agree to make

all appropriate tax filings on a basis consistent with

the agreed allocation, * * * and not to take a position

on any return or in any Proceeding that is inconsistent

with the terms of the agreed allocation.

1.3 CLOSING. The closing of the purchase

and sale of the Assets (the "Closing") will take place

at the offices of Katten Muchin Zavis, 525 West Monroe

Street, Suite 1600, Chicago, Illinois, at 10:00 a.m.

(local time) on the Closing Date.

DEFINITIONS. For purposes of this Agreement,

the following terms have the meanings specified:

"Closing Date" -- the date and time as of which

the Closing actually takes place.

'7.6

ASSIGNMENTS, SUCCESSORS, AND NO THIRD-

PARTY RIGHTS.

* * * Nothing expressed or referred to

in this Agreement will be construed to give any Person

other than the parties to this Agreement any legal or

equitable right, remedy, or claim under or with respect

to this Agreement or any provision of this Agreement .

EXHIBIT 1.1-A

EQUITY INTERESTS

100%

interest

in LR Management Company * * *

in LR Contracting Company * * *

in Quality First Contracting Company * * *

in LR Builders, Inc. * * *

100% interest in Lake Shore, LLC * * *

100%

interest

in LR Tower LLC * * *

in LR Fort Sheridan, LLC * * *

in LR Arcade, LLC * * *

in Plaines Town Center, LLC * * *

33.33% interest in Limits LLC * * *

-' 42 -

33 . 33% Limited Partnership a interest . in Winners Limited

Partnership * * * ,

-100% interest in Ridge Partners LLC * * *

»EXHIBIT 1.1-B

EXCLUDED ASSETS

100% interest.in Diversey and Sheffield, L.L.C..* * *

100% interest in Walton Associates, L.L.C. * * * *

Pursuant to the APA, BCA sold to petitioner the following

assets, some of which were subject to certain liabilities:

Assets

Cash

Net current assets

Fair Market Value

-0$8,873,149

Prepaid commissions

50 0 , O OO

Other assets

Furniture and fixtures

Leases

Equity interests:

260,484

100, 000

50, O00

Park Tower LLC

Arcade LLC

Lake Shore LLC

Limits LLC

Plaines Town Center- LLC

LR Fort Sheridan LLC

23 , 223 , 959

85, 206

4 420,232

170,126

1, 44'7, 596

3 , 621, 0 26

Lawrence Partners LP

100

6133 N. Kenmore LP

Amber Manor LP

100

Estes Partners LP

Humboldt Ridge LP

Jackson Park LP

Madison Park Place LP

Madison Renaissance LLC

Magnolia Partners LP

New Southtown LP

Ridge Partners LP

Sheridan Park Partners LP

100

732

100

67,*387

100

- 43 Union Square LP

Winthrop Partners LP

Winners LP

Quality First Inc.

LR Contracting Co.

LR Management Co.

Total assets

Less liabilities

Total assets net ofliabilities

100

1,275,945

100

44,097,342

18,882,973

25, 214, 369

The assets that BCA sold to petitioner and that petitioner

purchased from BCA under the APA constituted over 90 percent of.

the total value, and substantially all, of BCA's assets.

The

amount that petitioner paid for the assets that it purchased from

BCA was equal to their total fair market value.

On July 31, 2000, Castanet, Related, and petitioner executed

a document entitled "ASSUMPTION AGREEMENT"

ment).

(assumption agree-

The assumption agreement provided in pertinent part:

This Assumption Agreement (this "Agreement") is

made as of July 31, 2000 by and among CASTANET, INC., a

Delaware corporation ("CNI"), THE RELATED -COMPANIES,

L.P., a Delaware limited partnership ("Related"), and

LR Development Company LLC [petitioner], an Illinois

limited liability company ("LDC"). CNI, Related, and

LDC are collectively referred to herein as the "Parties".

WITNESSETH:

WHEREAS, CNI is a party to that certain Stock

Purchase Agreement (the "Stock Purchase Agreement")

dated July 31, 2000, by and between CNI and the Estate

of Bruce C. Abrams (the "Estate") * * *

WHEREAS,

CNI, LDC, and the Company [BCA]

have

entered into that certain Asset Purchase Agreement (the

"Asset Purchase Agreement") dated July 31, 2000, * * *

-4 44 -

NOW,

THEREFORE,

* * * CNI and Related represent,

warrant, covenant and agree as follows:

Assignment and Assumption. LDC hereby accepts and assumes all of CNI' s obligations under Sections 1.4 (b) * * * and Article V of the Stock Purchase

Agreement, " and Related hereby accepts and assumes

all of CNI's obligations under Sections 4.'7, 4.8 and

4:9 of the Stock Purchase Agreement, including without

limitation the obligations required of a Subsequent

Buyer (as defined in the Stock Purchase Agreement) pursuant to Section 4.9(b) (i) - (iv) of the Stock Purchase

Agreement (said obligations are collec-tively referred

to herein as, the ,"Obligations"): This assumption is

effective as of the date hereof and a copy of this

Agreement has been delivered to the Estate.

* *

4.4: No Reliance. Except for any assignees

permitted by Section 4.2 of this Agreement and except

for. the Estate who is hereby made a .third party beneficiary to this Agreement:

(a) no third party is enti. tled to rely on any of the agreements of the parties e

contained in this Agreement; and (b) the parties assume

no liability to any third party because of any reliance

, on the agreements of the parties contained in this

Agreement..

Under section 2 of the assumption agreement, pet-itioner

expressly assumed all of Castanet' s obligations ,under, inter

alia, section 5 of the SPA.

On July 31, 2000, Castanet, Related, and petitioner'executed

a document entitled "ASSIGNMENT OF STOCK PURCHASE AGREEMENT" ,

""Article V of the Stock Purchase Agreement" to which

section 2 of the assumption agreement referred is section 5 of

the SPA.

- 45 -

which the Abrams estate accepted and to. which Ms. Abrams agreed

on behalf of the Abrams estate on July 31, 2000.

That agreement

provided in pertinent part:

Assignment of Representations, Warranties and

Covenants.

(a)

[Castanet] * * * by these presents, hereby

(i) assigns to * * * [petitioner] and its successors

and assigns, äll of * * * [Castanet's] rights after the

Closing Date under the Stock Purchase-Agreement including without limitation all rights with respect to the

representations and warranties contained in Section 2

of the Stock Purchase Agreement and the rights to indemnification contained in Section 4 of the Stock Purchase Agreement, but expressly excluding the rights

assigned to Related under subparagraph 3(a) (ii) below,

and (ii) assigns to Related and its successors and assigns all of * * * [Castanet's] rights after the Closing Date under Sections 1.4, 4.7, 4.8, and 4.9 of the

Stock Purchase Agreement, in each case except to the

extent any rights under such Sections 2 or 4 relate to

Excluded Assets' under the Asset Purchase Agreement or

the business related thereto, but in any event including Excluded Liabilities relating thereto.

(b)

Notwithstanding the foregoing, if and to the

extent * * * [Castanet] otherwise or the Company []BCA]

directly suffers an indemnifiable Loss under Section 4

of the Stock Purchase Agreement, then * * * [Castanet]

shall be entitled to recover directly against the

[Abrams] Estate with respect thereto pursuant to the

terms of the Stock Purchase Agreement.

6.6 No Reliance. Except for any assignees permitted by Section 6.2 of this Agreement and except for

the [Abrams] Estate, who is hereby made a third party

beneficiary to this Assignment:

(a) no third party is

entitled to rely on any of the agreements of the parties contained in this Agreement; and (b) the parties

assume no liability to any third party because of any

reliance on the agreements of the parties contained in

this Agreement.

->46

Pursuant to section 1.2 of the SPA and section 2(c) of the

escrow agreement, Castanet paid the $25,410,295 purchase price

for all of the Abrams estate's BCA stock from a certain account

that Castanet maintained at- Rabobank (Castanet's account No. 9081

at Rabobank)" into a certain escrow account established at Rabobank for the purpose of holding the funds rëpresenting that

purchase.price.

Pursuants to section 1.2(a) of the APA and section 2(b) of

the escrow agreement, on August 1, 2000, Hypo Bank" deposited on

behalf of petitioner the funds representing the purchase price

for certain of BCA's assets (asset purchase price) into a certain

escrow account maintained at Rabobank on behalf of Castanet

(Castanet's escrow account No. 9107 at Rabobank).

.However, in

contravention of the es crow agreement , . on - the same date Ms . Dill,

acting as the sole officer of Castanet, directed Rabobank to

transfer the funds representing the asset purchase price from that escrow account to a certain account that BCA maintained at

Rabobank (BCA's account No. 9090 at Rabobank)s. , Rabobank complied

with Castanet's direction on August 1, 2000.

Also on August 1,

2000, Ms. Dill, acting -as the sole officer"of BCA, directed

"Before Castanet's payment of the $25,410,295 purchase

price from Castanet's account No. 9081 at Rabobank, U20?C had

deposited the $28 million that UAFC had lent to Castanet into

that account.

"Hypo Bank is the bank that made the loan to Related LR to

fund petitioner's purchase of certain of BCA's assets.

- 47 -

Rabobank to transfer the funds representing the asset purchase

price from BCA's account No. 9090 at Rabobank to Castanet's

account No. 9081 at Rabobank.

direction on that date.

Rabobank complied-with BCA's

On August 1, 2000, Ms. Dill, acting as

the sole officer of Castanet, requested that Rabobank use any

fynds in Castanet's account No. 9081 at Rabobank to repay Castanet's debt to UAFC.

Rabobank complied with Castanet's direction

on August 2, 2000, and used the funds in Castanet's account No.

9081 at Rabobank, including the funds representing the asset

purchase price, to repay that debt."

In order to facilitate the contribution of the Canadian

currency to BCA that was the subject of the July 21, 2000 fax

that Mr. Bae of Fortrend sent to Mr. Fitzgerald, one of

Fortrend's attorneys at Manatt, Castanet merged with and into BCA

around September 11, 2000.

Thereafter, SCALP owned 100 percent

of the stock of BCA.

Around September 12, 2000, SCALP made a capital contribution

to BCA of $68,000 (Canadian) in which SCALP claimed a tax basis

of $17,268,000

(U.S.).

(We shall refer to the $68,000

(Canadian)

that SCALP contributed to BCA as the Canadian currency.)

On October 11, 2000, Mr. Fitzgerald sent a memorandum to

certain other attorneys at Manatt.

In that memorandum, Mr.

"As required by section 5(a) of the escrow agreement,

Rabobank had (1) received the release notice and (2) made the

transfers described in the first sentence of section 4 of that

agreement.

- 48 Fitzgerald stated in pertinent part:

Subsequent. to the- stock purchase and the asset

sale, the Fortrend entity that purchased the stock of

* * * [BCA] merged downstream. This left * -* -* [BCA]

as the surviving corporation wholly owned by Signal

Capital Associates; L.P. ("SCALP") . . SCALP then trans

ferred to * * * [BCA] Canadian currency in the amount

of _$68, 000 (Canadian) but with sa tax basis in SCALP' s

hands stated to be $17,268,000.

We have been asked to render three tax opinions.

First, ,Fortrend has asked us. to proviide an opinion as

to the dollar amount of pre-contribution tax basis that

SCALP had in the Canadian currency. We have no knowledge of this basis.

SCALP will have to represent to us

this basis sfigure. Fortrend entities have-made such

representations to us in other transactions. Second,

Fortrend has asked us to provide an c opinion that the

transfer of the Canadian currency from SCALP to * * *

[BCAJ qualified under IRC Section 351.

This is the

same type of opinion we have rendered in other Fortrend

transactions. Third, Fortrend has asked us t·o provide

an opinion that * * * [BCA] took a carryover bas-is in

the Canadian currency and the dollar amount of the

basis * * * [BCA] had in the Canadian currency. Application of the IRC Section :362 carryover basi-s rules is

a consequence of'qualification under IRC Section 351.

We would just use the basis dollar amount represented

to us by SCALP.

Our opinions would be addressed solely to SCALP

and * * * [BCA] , which are now both Fortrend ,entities .

This is an "inside" Fortrend opinion. * * **

Drafts of the tax opinion letter and the representations letter are enclosed.

I am sending copies to

Fortrend for their simultaneous review.

Pursuant to

policy decisions sour firm has reached concerning

Fortrend tax opinions and my review of the documents, I

recommend approval of the enclosures .

On October 11, 2000, Mr. Fitzgerald,sent a letter (Mr.

Fitzgerald's October 11, 2000 letter) to Ms. 'Dill, the sole

officer and the sole director of BCA and an employee of Fortrend,

- 49 -

and attached to that letter "a draft tax opinion letter and a

draft representations letter supporting the opinions for the LR

Development contribution.transaction [the contribution of the

Canadian currency to BCA].""

Around October 25; 2000, BCA converted the Canadian currency

into U.S. dollars.

On November 1, 2000, BCA and SCALP sent-a joint letter

(November 1, 2000 representation.letter) to Manatt.

In that

letter, BCA and SCALP made certain representations to Manatt on

which Manatt relied in rendering its opinion regarding certain

tax issues involved in SCALP's contribution to BCA of the Canadian currency.

In the November 1, 2000 representation letter,

BCA and SCALP stated in pertinent part:

Signal Capital Associates, L.P., * * * ("Parent")

and Bruce C. Abrams, Inc., * * * ("Subsidiary"), have

requested your opinion regarding certain federal income

tax consequences of a transaction (the -"Contribution")

whereby Parent transferred certain Canadian currency in

the denomination of $68,000 (Canadian) to Subsidiary.

* * * Parent was the sole shareholder of Subsidiary both before and after the Contribution. Accordingly, Parent joins in the representations and statements in this letter.

Parent and Subsidiary understand

that the conclusions in your opinion letter are dependent in part on the accuracy of this representations

letter and that your opinion could be adversely affected if this representations letter is not true; correct

and complete.

"The record does not contain the "draft tax opinion letter"

or the "draft representations letter" to which Mr. Fitzgerald

referred in Mr. Fitzgerald's October 11, 2000 letter.

- 50 -

Parent and Subsidiary -haie asked you to address

solely the federal income tax consequences of the

Contribution that are specifically set forth in your

draft tax opinion letter referred to above. 4 Parent

and Subsidiary are aware that the Contribution may

involve many other tax issues and consequences under

the Internal Revenue Code of 1986, as amended (the

"Code"), and other tax statutes. However, Parent and

Subsidiary have- not asked you- to consider or render an

opinion regarding such other tax issues .

For purposes of your tax opinion, Parent and Subsidiary -represent ,to you, after due investigation, as

follows:

All factual statements in your draft tax

opinion letter concerning the Contribution are true

correct and complete.

On September 12

2000,

Parent and Subsidiary

took all proper action ,to transfer from-Parent to Subsidiary beneficial ownership of Canadian currency with

a denomination of $68, 000 (Canadian) and a tax basis of

$17,268,000 (U.S.) . Parent's tax basis for the Canadian currency that Parent transferred to Subsidiary was

$17, 268, 000 in the aggregate immediately before the

Contribution.

Both Parent -and Subsidiary had substantial

non-tax business reasons for engaging in .the Contribution. Both Parent and Subsidiary entered into the

Contribution with a view toward making an economic

profit apart from tax consequences.

Parent and Subsidiary have treated and will

treat the Contribution in a manner that is consistent

with its form.

At the time of the Contribution and thereafter,r Parent owned 100% of -the issued and outstanding

shares of.Subsidiary. , Due to its ownership of all of

the Subsidiary stock, issuance of more Subsidiary

shares to Parent in connection with the Contribution

would have been meaningless .

For this reason, Subsidiary did not issue shares to Parent as a result of the

Contribution.

"See supra note 30.

- 51 -

No stock or securities were or will be issued

by Subsidiary for services rendered to or for the

benefit of Subsidiary in connection with the Contribution. No stock or securities were or will be issued by

Subsidiary for indebtedness of Subsidiary that is not

evidenced by a security or for interest on indebtedness

of Subsidiary which accrued on or after the beginning

of the holding period of Parent for the debt.

Parent neither accumulated receivables nor

made any extraordinary payment of payables in anticipation of the Contribution. , Subsidiafy has reported and

will report items which, but for the Contribution,

would have resulted in income or deduction to Parent in

a period subsequent to the Contribution and such items

have and will constitute- income or deductions to Subsidiary when received or paid by Subsidiary.

The Contribution was not the result of solicitation by a promoter, broker or investment house.

Parent did not retain any beneficial ownership in the Canadian currency it transferred to Subsidiary.

10. Subsidiary did not take the Canadian currency

subject to any debt and did not assume any debt of

Parent in connection with the Contribution.

11. There was no indebtedness between Subsidiary

and Parent and there was no indebtedness created in

favor of Parent as a result of the Contribution.

12. The Contribution occurred under a plan agreed

upon before the 'Contribution in which the rights of the

parties were defined.

13. There was no plan or intention on the part of

Subsidiary to redeem or otherwise reacquire any Subsidiary stock held by Parent.

14. Taking into account any issuance of additional shares of Subsidiary stock, any issuance of

stock for services, the exercise of any Subsidiary

stock rights, warrants or subscriptions, any public

offering of Subsidiary stock and the sale, exchange,

transfer by gift, or other disposition of any of the

stock of Subsidïary held by Parent, Parent was in

- 52 -

"control" of Subsidiary within -the meaning of Section 368 (c) of the Coder at the time of the Contribution. At

the time of the Contribution, iParent was not under a

binding obligation, and had no plan or intention, to

dispose of any portion of its stock in Subsidiary

following the Contribution.

15. Subsidiary-and Parent each paid their own o

expenses incurred in connection with the Contribution.

16 . Atethe stime of the Contribution, Subsidiary ,

was not an "investment company" within the meaning - of

Section.351(e) of the Code.

17 ; a You may rely on the accuracy of the representations herein for purposes of your tax opinion letter

without further inquiry or independent -investigation

18 . Parent and Subs idiary- hereby iconsent to your

reference to this representations letter in your tax

opinion letter.

19. The undersigned have undertaken such'investigation as the undersigned deemed necessary to ensure

the accuracy of the foregoing representations.

On November 1, 2000; Manatt sent a tax opinion eletter

(Manatt' s November 1, 2000 tax opinion letter) to BCA and SCALP

In that tax opinion letter, Manatt stated in pertinent part:

In accordance with your request, we provide the

following analysis 'and opinions relating to certain

federal income ,tax, consequences' of the transaction (the 5

"Contribution") whereby Signal Capital Associates,«

L . P . , * * * ( "Parent" ) , contributed certain Canadian

currency to-Bruce C. Abrams, Inc., * * * ("Subsid-

iary") .

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-Canadian currency would have been meaningless ,(due

to athe existing,ownership by Parent of .100% of Subsidiary) .

- 53 -

We have also relied for purposes of this letter on

facts set forth in a representations letter from Parent

and Subsidiary to us of even date herewith. Among the

:cepresentations in that letter are representations

that, for federal income tax purposes, Parent' s tax

basis for the Canadian currency that Parent contributed

to Subsidiary was $17, 268, 000 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 utrue, correct and complete, our opinions

could be .adversely affected.

Any change or inaccuracy in the facts set forth in

the documents specified above" or in the above-referenced representations letter could adversely affect our

opinions .

* * *.

In the case of transactions such as the Contribution, many federal, state and local income and other

tax consequences arise. We have been asked only to

address the issues specifically set forth below. No

opinion is expressed regarding any other issues.

Subject to the foregoing, it is our opinion that,

more likely than not:

(a)

The Contribution satisfied the requirements

of Section 351 of the [Internal Revenue] Code.

(b)

The tax basis for the ¯Canadian currency

transferred from Parent to Subsidiary in the Contribution was a carryover tax basis in accordance with

Section 362 of the [Internal Revenue] Code.

"Manatt' s November 1, 2000 tax opinion letter listed

various documents on which Manatt relied in rendei-ing its

opinions . We have not quoted the entire opinion letter or

described all of the documents on which Manatt relied because

they are not material to our resolution of the issues in this

case.

- 54 -

(c)

Based on the representations made to us'in

the above-referenced representations letter from Parent

and Subsidiary, the -carryover tax basis for Subsidiary

- was $17, 268, 000 for the 'Canadian currency contributed

to Subsidiary.

On February 8, 2002, BCA dissolved.

On the same date, BCA

filed with the secretary of state -of the State of Ill'inois

articles of dissolution, which Stephen Galler and Thomas Weeks

had signed on behalf of BCA on January 14, 2002.

Those articles

stated that BCA' s stockholders had authorized the dissolution of

BCA on December 13, 2001.

On or before September 15, 2001, BCA filed Form 1*1'20S, U.S.

Income Tax Return for an S Corporation, for the taxable year that

began January 1, 2000, arid ended July 31,: 2000

return) .

(7/31/00 BCA

BCA indicated in the 7/31/00 BCA return that that

return was its final S corporation return

BCA included with the 7/31/00 BCA return Schedule L, Balance

Sheets per Books (Schedule L) . 4 In that schedule, BCA reported .

total assets of $25, 482, 604 as of July 31, 2000, the end of the

short taxable year for which that return was filed.

BCA also

included with the 7/31/00 BCA' return a document that stated in

pertinent part:

1.1362-2(b) (1)

"This is to provide notificatiion under Reg.

that Bruce C. Abrams,. Inc. terminated its S status

effective as of July 31, 2000, due to a transfer of stock to a

corporation; thereby terminating its S status under-IRC Sec.- *

1361 (b) (1) (B) . "

- 55 -

On September 17, 2001, BCA timely filed Form 1120, U.S.

Corporation Income Tax Return (Form 1120), for the taxable year

that began August 1, 2000, and ended December 31,

BCA return).

2000 (12/31/00

In the 12/31/00 BCA return, BCA reported total

income of $17,972,779, that included a gain of $16,678,066 frod

the sale of certain assets that BCA sold to petitioner pursuant

to the APA.

In the 12/31/00 BCA return, .BCA claimed total deductions of

$18,338,661 that included a deduction for a claimed loss of

$17,223,844 (Canadian currency loss) for "IRC SEC. 988 loss on

foreign currency"= (i.e., the.Canadian currency that SCALP contributed to BCA).

That claimed loss deduction was calculated as

the difference between BCA's claimed $17,268,000 carryover basis

under section 362 in the Canadian currency and the claimed

$44,156 fair market value of that currency at the time BCA

converted it into U.S. dollars.

In the 12/31/00 BCA return, BCA

reported a net operating loss of $365,882 and total tax of zero.

BCA included with the 12/31/00 BCA return Schedule L.

that schedule, BCA reported total assets of $3,277,516 as of •

December 31, 2000, the end of the short taxable year for which

that return was filed.

On September 17, 2002, BCA filed Form 1120 for its taxable

year 2001 (12/31/01 BCA return).

In that return, BCA stated that

its address was¯in Alexandria, Virginia (last known address).

-:56 the 12/31/01 BCA return, BCA indicated thats that return would be

its ,f inal return.

In the 12/31/01 BCA retui-n, BCA reported total-income of

$220', 721, claimed total deductioris of $48 j319, and carried

forward $172,402 of the $365,882 net, operating loss that it had

claimed in the 12/31/00 BCA return. . In the 12/31/01 BCA return

BCA reported taxable income of zero and total tax of zero.

BCA included with the 12/31/01 , BCA. return Schedule" L ?

that schedule, BCA reported total assets of zero as of ethe end of

its taxable »year 200]:.

Around September 19, 2001, petitioner, filed with"responderit

Form 1065

U.S. Return of Partnership Income, for its taxable

ye ar that began July 31 / 20 0 0 , and ended December 31, 20 0 0 .

Petitioner, included with that form Schedule L.

In that schedtile

petitioner reported- total -assets "of $78, O91, 661 as of December

31, 2000, the end of, its short taxable year.

. On August 13, 2004, respondent issued,to the :Abrams -estate a

notice of deficiency (Abrams estate notice) with respect to its ,

taxable year ended October 31, 2000.

In that notice, .respondent

determined, inter alia, that, the~ Abrams estate (1) had failed to

substantiate the basis that it had claimed "in the stock of BCA

that it sold to Castanet under the SPA and (2) had additional

ordinary income from BCA.

Respondent did not determine in t-he

Abrams estate notice to disregard the Abrams estate' s sale of its

-«57

BCA stock to Castanet and to treat BCA's sale of certain of its

assets as having occurred while the Abrams estate owned the stock

of BCA.

As a result of the determinations in the Abrams estate

notice, respondent determined a deficiency.of $14,514,038 in the

Abrams estate' s tax.

The Abrams estate timely filed a petition with the Court in

which it disputed the deficiency that respondent determined in

the Abrams estate notice.

On February 24, 2006, the Court

entered a stipulated decision in that case that there was no

deficiency in tax due from the Abrams estate for its taxable year

ended October 31, 2000.

On August 13, 2004, respondent issued to BCA at its last

known address a notice of deficiency for its taxable year ended

December 31, 2000 (lBCA notice).

In that notice, respondent

determined a deficiency of $7,507,972 in BCA's tax for that year.

Virtually all of that deficiency resulted from respondent's

determination to disallow the Canadian currency loss of

$17,223,844 that BCA claimed in the 12/31/00 BCA return.

Respon-

dent disailowed that loss "because you []BCA] have failed to

establish the basis in the assets or that a loss was otherwise

sustained during taxable year 2000 in the amount claimed."

the BCA notice, respondent also determined an accuracy-related

penalty under section= 6662(a) of $1,501,594.50.

- 58 BCA did not file a petition with the Court with respect to

the BCA notice.

On February 7, 2005, respondent assessed ,the de-

ficiency and the accuracy-related penalty totaling $9,009,566.,50

that respondent had determined in the BCA -notice as well as

interest thereon as provided by law through that date.

(Wes shall

refer to those assessed amounts for BCA's short taxable year

ended December 31, 2000, as well as all interest thereon as

provided by law after February 7, 2005, as BCA's tax liability.)

As of - the time of the trial .in this case, BCA had-not paid any of

BCA'es tax liability.

On June 18, 2005, respondent opened a collection case; and

on June 29, 2005, respondent assigned .a revenue officer (first

revenue officer) to conduct collection activities with respect to

BCA's, tax liability.

On Junes29, 2005,- the first revenue officer

reviewed respondent' s Integrated Data tRetrieval System databasewith respect to BCA.

On July 22, 2005, the first revenue officer went ,to BCA's

last known address.

On July 26*, 2005, the first revenue officer

used certain databaseesystems in order to perform certain re

search with respect to BCA*.

On the same date, the first revenue

officer requested authorization to file a notice of Federal tax

lien (notice of tax lien) with respect to BCA' s tax liabilitty.

On August 2, 2005, respondent recorded a notice of tax lien with

59 -

respect to 'BCA's tax liability with the Virginia State Corpora-

tion Commission.

On !July 27, 2005, the first revenue officeråreviewed certain

data transcripts maintáined by the Internal' Revenué Service and

certain State and local government records relating to BCA in

order to identify potential :sources of income or assets of BCA on

which respondent might levy.MThe first revenue officer did not

identify any such sóurces from.that review.

On July 27, 2005, respondent- sent to BCA at its last known

address Letter 1058, Notice of Intent to Levy and Notice of the

Right to a Hearing (notice of levy) .

On August 1, 2005, respon-

dent received confirmation that delivery, of the notice of levy

had been accepted.

On Augu'st 31, 2005, the: first tevenue officer requested

assistance"from another revenue officer (second revenue officer)

in Chicago.

The first revenue officer asked the second revenue

officer to visit certain offices that petitioner was occupying at

the time, which the second revenue officer did on October '4,

2005.

On September 16, 2005, the fsirst revenue officer identified

Golden Gate Bank as a potential, source on which respondent might

levy with re pect to BCA's -tax liability.

On the same date, the

"The record does not establish who accepted the notice of

levy on behalf of'BCA. Nor does the record establish whether BCA

appealed the notice of levy to respondent's Appeals Office.

- 360 -

first revenue" officer inailed to Golden Gate Bank a copy of 'a

notice of levy with respect to that liability.

On September 29

2005,, the first revenue officer terminated-the levy action

involving -Golden Gate Bank .because BCA did not maintain any

accounts at that bank.

On October 5, a2005, "the second revenue

officer reviewed certain records maintained by the secretary of

state of the State of Illinois ..

had dissolved.

That review disclosed that -BCA

On October 19, 2005, respondent closed as

noncollectible the collection case with .respect to BCA'.s tax

liabi-lity because BCA had dissolved.

At no stime did the first revenue,officer.or the second

revenue officer interview or issue, a summons to Larry Austin

who

had signed the 12/31/00 BCA return as BCA's president.

On April 18, 2006, respondent reopened the ,collection case

with respect to BCA' s tax liability and assigned it' to respon-

dent's examination division for consideration of possible transferee :liability.

Respondent issuedato petitioner a notice of liability in I

which respondent determined that petitioner is liable as a

transferee of BCA for BCA' s tax liability.

OPINION

Respondent bears the burden of establishing thàt petitioner

is liable under section 6901 for BCA' s tax liability as a trans-

- -61 feree-of property of BCA.(BCA',s transferee)-.904See seca 6902(a);