Attorney-at-Law

IT’S NOT FRAUD

In Uncategorized on 12/01/2015 at 17:07

If You Can’t Prove It

We have another replay of the fraudulent conveyance-transferee liability-Section 6901 drama in John M. Alterman Trust u/a/d May 9, 2000, Ronald Gordon and Donald Gavid, Trustees, Transferee, et al., 2015 T. C. Memo. 231, filed 12/1/15. IRS here has the burden of proof, and they can’t carry the weight.

This is yet another of MidCoast’s skulldugging. I’ve blogged these by the carload, so no citations. Judge Buch has all the cases in his opinion, anyway.

Here, MidCoast buys up the Alterman family trucking business, claiming they’ll reengineer the company into a bottom-fishing debt collector and lay off the built-in gain in the Alterman’s C Corp with bad debts.

Of course, they do nothing of the kind. Lying even to their own personnel, the MidCoast capos get short-term loans to fund the buyout, offshore the cash they get from the assets of the purchased Alterman C Corp, and do the phony currency option shellgame, buying major and selling minor, recognizing one but not the other. Then they collapse the vehicle they used.

Judge Buch is a-weary of this stuff.

“Courts, including this court, have been plagued by Midco cases. Rarely do these cases present themselves for a determination of the underlying liabilities. Instead, these cases are postured so that the courts are asked to determine whether someone other than the taxpayer should be on the hook for the taxpayer’s liability. They are transferee liability cases, and so are these cases.

“The fact patterns of these cases are similar. Someone sells an interest in a corporation for a good price; the corporation doesn’t pay its taxes; and the Internal Revenue Service (IRS) goes after the former shareholder for the taxes.

“The outcomes of these cases vary. Many taxpayers have prevailed at the trial court, but many of those taxpayers have seen their victories turned to defeat on appeal. The IRS has likewise prevailed at the trial court, and its victories have uniformly survived appeal. Rarest of all is the taxpayer victory that survives appeal.” 2015 T. C. Memo. 231, at pp. 2-3.

But this case is a taxpayer win. The Altermans had good attorneys and CPAs. They sussed out the deal, got reps and warranties in the contract of sale.

Read it, practitioner.

“The final share purchase agreement included the following promises by MidCoast:

– MidCoast would not allow AC to be dissolved or liquidated for at least four years and had no intention of allowing that after four years either.

MidCoast would reengineer AC into an asset recovery business.

– MidCoast would ensure that AC invested at least $1,450,000 into delinquent receivables and would reinvest the proceeds into more delinquent receivables for the next 10 years.

– MidCoast would ensure that AC maintained a net worth of at least $1.5 million for at least four years.

– MidCoast would ‘cause * * * [AC] to pay the Deferred Tax Liability to the extent that the Deferred Tax Liability is due given the Company’s post-closing business activities and shall file all federal and state income tax returns on a timely basis related thereto.’

– MidCoast would indemnify the former shareholders against any and all claims, including any damages, losses, deficiencies, liabilities, costs, and expenses resulting from and relating to any ‘misrepresentation, breach of warranty or nonfulfillment of any agreement or covenant on the part of any Purchaser under this Agreement’.

– MidCoast would represent that the ‘combined net worth of Purchasers exceeds $10,000,000 as of the date hereof and as of the Closing Date.’” 2015 T. C. Memo. 231, at pp. 37-38.

Of course, MidCoast did nothing of the kind.

IRS says there should have been a postclosing audit by the Altermans. Nonsense. No buyer lets the outgoing seller romp through her records. And, in my experience, most sellers never want to see the buyer again.

IRS ransacks the FUFTA (Florida Uniform Fraudulent Transfers Act), but the Altermans and Judge Buch show that MidCoast’s vehicle wasn’t insolvent as the time of transfer, and IRS can’t prove that the offshore to which cash was funneled was out of the control of MidCoast’s vehicle.

It’s a complicated web, as a weary Judge Buch agrees (see p. 86).

But the Altermans are innocent. And I bet this one stands up on appeal.

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