“Pigs Git Fat, and Hogs Git Et”

No, this is not a further tale of Jonathan Swift’s peripatetic hero Lemuel, but rather a different wanderer in realms of gold. And the folk wisdom abovecited comes from the advice the battle-tested lawyer gives this blogpost’s subject, which he carefully ignores.

Come along with me, if you will, as an old professor of mine used to say, and follow the tangled trail of Richard H. Cullifer, Transferee, 2014 T. C. Memo. 208, filed 10/7/14, as untangled by Judge Laro.

Cullifer started as a banker, but discovered the joys of real estate development. His big strike came when he discovered ammonia. There was a shortage, so he bought a beat-up old chemical plant in Texas’ Pollution Belt, converted it, and started importing ammonia. His vehicle was a C Corp, of course.

So much did the business flourish that Cullifer switched to other chemicals as well, and finally looked to sell. However, his basis in his C Corp stock was, as we say in the real estate development trade, bupkis, and his gain heavy-duty, and trapped in the C Corp.

Enter an exec from a would-be acquirer who introduces Cullifer to (drumroll)–our old chum MidCoast Investments.

Judge Laro: “We observe that MidCoast has been involved in a number of transactions in cases that have come before us. See, e.g. Hawk v. Commissioner, T.C. Memo. 2012-259; Feldman v. Commissioner, T.C. Memo. 2011-297; Starnes v. Commissioner, T.C. Memo. 2011-63, aff’d, 680 F.3d 417 (4th Cir. 2012); Griffin v. Commissioner, T.C. Memo. 2011-61.” 2104 T. C. Memo. 208, at p. 8, footnote 6.

I will not cite to my blogposts covering most of these. By now, my readers, few in number but strong in stomach, must know the games MidCoast and its alter egos played.

Cullifer already sold all the assets, tangible and intangible, of his C Corp (and put $1 million of the proceeds in his personal bank account, but not on his Form 1040).

Now to unload the stock.

Well, the battle-tested lawyer abovecited, Robert Thomas, Esq., sounds the alarm. (“Mr. Thomas is certified by the Texas Board of Legal Specialization in estate planning, probate law, and tax law. Over the past 25 years, Mr. Thomas has represented clients in over 100 corporate purchase and sale transactions.” 2014 T. C. Memo. 208, at p. 6, footnote 4.)

“…I still have the same feeling that any buyer of the stock may not be able to get the tax benefits they think they will get if they ever get audited. But, that won’t be OUR issue as long as we carefully limit our reps and warranties in the sale agreement. * * *

“Mr. Thomas concluded:

“DO NOT SIGN ANY LETTER OF INTENT OR ANYTHING ELSE REGARDING A POTENTIAL … STOCK SALE UNTIL YOU LET ME REVIEW/BLESS IT FROM THE LEGAL END. WE DON’T WANT TO GET TRAPPED HERE.” 2014 T. C. Memo. 208, at p. 18.

So colleague Thomas asks the MidCoast people for representations, guarantees, warranties and indemnities. The go-between says no one will give them, and it’s a roadmap for IRS if they give them.

We’ve all heard that one before. Mr. Thomas gives the right answer, of course.

“Well, …actually it just amounts to me looking out for my client. I’m not trying to kill a deal, make a sale or make a commission here. Where I am from, there is a time-honored axiom of high finance which goes like this: pigs git fat, and hogs git et.” 2014 T. C. Memo. 208, at p. 19.

Need I say more? Well, you know I will.

Cullifer liked MidCoast because he would pass their building on I-95 in Florida. It looked solid.

Mr. Thomas wanted guarantees, etc., from MidCoast, but the final purchaser wasn’t MidCoast, of course, but one of its shell-shills. So Mr Thomas sounded the alarm again.

“One thing right off the top that should be a deal killer–where the hell did Midcoast go? …. The business risk to you without Midcoast or other party with money is that there is no one there to step up and honor the indemnity for tax liabilities fye [(for year ending)] 9/30/04 which would otherwise be due on corp asset sale … if IRS comes calling in 2005, or [the shell-shill] does something screwey post stock sale that gets us in trouble with IRS or whoever. Seems to me Midcoast must be a party or at least guarantee the performance of all obligations, etc of [shell-shill] under the agreement.” 2014 T. C. Memo. 208, at p. 26.

Of course, Cullifer signs on with the shell-shill.

And the shell-shill does the usual roundy-rounder, loading up yet another counterparty with some junk loans, claims a bad debt deduction to offset the gain from the asset sale and the stock sale, and disappears into the night.

Cullifer, true to form, never bothers to include the gain on the stock sale on his 1040.

Unsurprisingly, IRS blows this out of the water.

While Judge Laro blows off IRS’s expert on the subject of economic substance (that’s a mixed matter of fact and law, and the Court will decide that one), it’s clear the bad debt deduction is a joke, as the trash transferred to the counterparty had a basis near zero, not $17 million as claimed.

This is a “Midco” deal, as described in Notice 2001-16, 2001-1 C.B. 730, clarified by Notice 2008-111, 2008-51 I.R.B. 1299. The idea of having an intermediary buy the stock of a C Corp (without reduction for the tax liability of the built-in gain), sell the assets to a genuine buyer, and transfer the net proceeds of sale to the seller of the stock, is identified as a “listed transaction”. And because the intermediary is a judgment-proof shell-shill who tries to offset the taxable gain on the stock with shenanigans as described in the numerous MidCoast cases, the tax liability falls on the transferor (seller) of the stock.

OK, so it’s time to parse the Texas fraudulent transfer statute, and Cullifer falls right into it. He knowingly made this deal to delay, defeat and hinder IRS. I’ll spare you Judge Laro’s extensive analysis.

IRS wants to stick Cullifer with the money MidCoast pulled out of the deal, and concomitant tax, but Judge Laro says no, Cullifer didn’t get that money, so I’ll only nail him for what he did get. And though he got it as the transferee-of-a-transferee, because of MidCoast’s ballet with various shell-shills, that doesn’t matter.

And IRS did make reasonable efforts to collect. They filed liens and did searches against one shell-shill, and the other was hopelessly insolvent, so further efforts were a waste of time. While there might be other parties against whom IRS might go, the liability is joint and several, so IRS can smite one or any, as it chooses. Whereupon Cullifer the smitten can go smite the others by way of contribution, if he can find them.

Takeaway–See my blogpost “Listen to Your Lawyer”, 6/19/14.