In Uncategorized on 07/12/2017 at 01:25

This one is a Midco in two parts, with a head-spinning roundy-round of cash and a platoon of characters, that ends up with “a couple other escrow accounts,” and a lot more about MN voidable transaction, tax and corporate law than you’d want to know.

And if after that you can’t guess which Judge wrote the opinion in Donald J. Buckrey, et al, 2017 T. C. Memo 138, filed 7/11/17, you haven’t been paying attention.

Buck and the als have stock in a C Corp, basis bupkis, built-in gain exponential, and a buyer who wants assets, not stock. Buck and the als sell the operating assets to buyer via a Midcoast shill. There’s some window-dressing due diligence, but a lot of that never makes it into the record.

Buck and the als distribute the remaining non-cash assets to themselves: “accounts receivable from the three owners, tax refunds, prepaid insurance refunds, and future cash from [buyer] from the earlier asset sale–to the shareholders in redemption of approximately 36% of their total shares.” 2017 T. C. Memo. 138, at p. 6.

The C Corp has only the cash from the asset sale and a yuge tax liability. Money gets wired from Midcoast (maybe; it’s a question of fact where the money came from) into an escrow account where also is kept the money from the asset sale. MidCoast gets paid, Buck and the als get a premium over the ex-tax price, and some sits against future claims but eventually mostly gets paid to Buck and the als.

Comes the usual Son-of-BOSS mix-and-match, featuring the shill.

Judge Holmes: “Son-of-BOSS deals were generally used to artificially inflate someone’s basis in a partnership interest by contributing assets with large contingent liabilities (which were ignored in computing basis) and then selling this interest at fair market value for a huge tax (but no economic) loss. See, e.g., RJT Invs. X v. Commissioner, 491 F.3d 732 (8th Cir. 2007) (involving typical Son-of-BOSS transaction); Kligfeld Holdings v. Commissioner, 128 T.C. 192 (2007). There are other variations, see, e.g., Home Concrete & Supply, LLC v. United States, 634 F.3d 249 (4th Cir. 2011). We’ve never found a Son-of-BOSS transaction that worked.” 2107 T. C. Memo. 138, at p. 11, footnote 5.

IRS wants to collapse everything, but that fails as MN Uniform Fraudulent Transfer Act (MUFTA) says each transfer stands on its own. And if the deal were to be collapsed and treated as a liquidation and distribution, MN corporate law says that creditors get no rights to fight a distribution, only the corporation, receivers and shareholders. Though strange, other States do likewise, and Judge Holmes isn’t fighting with them.

IRS claims the escrow arrangement, where money from buyer and shill was lumped together, was itself a fraudulent transfer. “We agree with the shareholders that the escrow agreement unambiguously identified which money was coming from whom and where the escrow agent should send it. The agreement required the escrow agent to transfer the exact amount of money that it received from MidCoast to three different accounts and the exact amount of money received from [shill] to MidCoast’s operating account. The escrow agent’s contractual duties trump the fact that the funds were very briefly placed in the same account.” 2017 T. C. Memo. 138, at p. 36.

In the end, though, these are motions for summary J, and since the money trail isn’t clear, transferee-of-a-transferee and for-the-benefit-of theories won’t work.

Here’s the story: “There are material facts in dispute that prevent us from ruling on whether the shareholders are liable under the transferee-of-a-transferee or for-the-benefit of theories because it’s unclear at the moment which entity actually paid for the stock and which entity actually received the stock. There are also material facts in dispute concerning the shareholders’ actual intent to enter into fraudulent transfers. To the extent that we hold that Minnesota law prevents us from collapsing the transfers and finding that the shareholders received a transfer directly from BNP, we will grant the shareholders’ motion. We also will grant the shareholders’ motion to the extent we find that the partial stock redemption wasn’t a fraudulent transfer. The rest of the shareholders’ motion will be denied, and the Commissioner’s motion will be denied.” 2017 T. C. Memo. 138, at p. 53.


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