Billy F. Hawk, Jr., GST Non-Exempt Marital Trust v. Commissioner of Internal Revenue , 924 F.3d 821 ( 2019 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit I.O.P. 32.1(b)
File Name: 19a0092p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
BILLY F. HAWK, JR., GST NON-EXEMPT MARITAL ┐
TRUST, Trustee, Transferee, Nancy Sue Hawk and │
Regions Bank, Co-Trustees; ESTATE OF BILLY F. │
HAWK, JUNIOR, Trustee, Transferee, Nancy Sue Hawk │
and Regions Bank, Co-Executors; BILLY F. HAWK, JR., │
GST EXEMPT MARITAL TRUST, Trustee, Transferee, > No. 18-1534
│
Nancy Sue Hawk and Regions Bank, Co-Trustees;
│
NANCY SUE HAWK, Transferee,
│
Petitioners-Appellants, │
│
v. │
│
│
COMMISSIONER OF INTERNAL REVENUE, │
Respondent-Appellee. │
┘
Appeal from the United States Tax Court;
Nos. 30024-09; 30025-09; 30026-09; 30515-09—Joseph R. Goeke, Judge.
Argued: April 30, 2019
Decided and Filed: May 15, 2019
Before: GUY, SUTTON, and NALBANDIAN, Circuit Judges.
_________________
COUNSEL
ARGUED: J. Eric Butler, LEWIS, THOMASON, KING, KRIEG & WALDROP, P.C.,
Knoxville, Tennessee, for Appellants. Arthur T. Catterall, UNITED STATES DEPARTMENT
OF JUSTICE, Washington, D.C., for Appellee. ON BRIEF: J. Eric Butler, Katherine Sanford
Goodner, LEWIS, THOMASON, KING, KRIEG & WALDROP, P.C., Knoxville, Tennessee,
Ashley Hodges Morgan, LEWIS, THOMASON, KING, KRIEG & WALDROP, P.C., Memphis,
Tennessee, David S. Garbett, Brian P. Yates, GARBETT, ALLEN & ROZA, P.A., Miami,
Florida, John P. Konvalinka, GRANT, KONVALINKA & HARRISON, P.C., Chattanooga,
Tennessee, for Appellants. Arthur T. Catterall, Gilbert S. Rothenberg, Richard Caldarone,
UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
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OPINION
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SUTTON, Circuit Judge. After Billy Hawk died in 2000, his wife Nancy Sue decided to
sell the family bowling business, Holiday Bowl. With the help of lawyers and accountants, she
made a deal with MidCoast, a company that claimed an interest in acquiring companies with
corporate tax liabilities that it could set off against its net-operating losses. Holiday Bowl first
sold its assets—bowling alleys—to Bowl New England, receiving $4.2 million in cash and
generating about $1 million in federal taxes. After that, Nancy Sue and Billy’s estate sold
Holiday Bowl to MidCoast for about $3.4 million, in essence exchanging one pile of cash for
another minus the tax debt MidCoast agreed to pay. But MidCoast never paid the taxes. The
United States filed this transferee-liability action against Nancy Sue Hawk and Billy Hawk’s
estate to recover Holiday Bowl’s unpaid taxes. The Tax Court ruled for the government,
concluding that the Hawks were transferees of a delinquent taxpayer under federal law and
permitting the government to recover the unpaid taxes from the Hawks under Tennessee law.
We affirm.
I.
When shareholders sell a privately held corporation, they have a range of options. One is
an asset sale, in which the corporation sells its assets (e.g., the bowling alleys), pays a tax on the
gain, and distributes what’s left to the shareholders. In this setting, the Commissioner taxes the
corporation upon the sale of the assets and taxes the shareholders when they receive their
distributions.
Another option is a stock sale, in which the shareholders sell their stock to a third party.
Because the corporation never sells its assets, the transaction doesn’t trigger corporate tax, and
the original shareholders pay only their individual income taxes. If the new owners dispose of
the corporate assets down the road, however, the corporation will incur taxes then. Buyers in a
stock sale often pay less to account for future taxes they must pay.
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After Billy Hawk’s death in 2000, Nancy Sue owned almost a fifth of the company’s
stock and her husband’s estate owned the remainder. Billy and Nancy Sue’s two sons operated
the two bowling alleys awhile. But that didn’t work. By 2002, she realized she needed to sell
Holiday Bowl. She chose an asset sale to Bowl New England. The sale left Holiday Bowl with
$4.2 million in cash and left the company owing about $1 million in federal income taxes and
about $200,000 in state taxes. Holiday Bowl also owned some real property, a family horse farm
that Nancy Sue wanted to keep, valued at $777,000.
Trying to lower the corporate taxes triggered by the transaction, the Hawks’ broker
approached their attorney with information about a company called MidCoast that had
“tremendous tax-loss carry-forwards.” J.A. 3 at 797. If MidCoast bought Holiday Bowl, the
broker advertised, Holiday Bowl would not need to pay corporate taxes on the asset sale. As a
result, MidCoast promised to pay the Hawks more than Holiday Bowl’s actual value—what
would have been its cash on hand minus outstanding taxes. Nancy Sue Hawk and the estate
stood to keep an extra $200,000 to $300,000 by structuring the transaction in this way.
MidCoast purported to offer Holiday Bowl a way to realize the best attributes of an asset sale
(the higher sale price of the assets) and a stock sale (no corporate-level tax). In closing his
recommendation, the broker, warily but not warily enough, said: “[I]f it seems too good to be
true, it probably is. But maybe this is the exception.” Id. at 798.
The Hawks proceeded to enjoy what looked like a free lunch. Under the purchase
agreement, the Hawks sold Holiday Bowl some of their shares in exchange for the company’s
remaining property, the horse farm. That left Holiday Bowl with nothing but cash. MidCoast
paid $3.4 million plus expenses for Holiday Bowl’s $4.2 million. To finance the transaction,
MidCoast claimed it would borrow money from a company called Sequoia Capital. According
to MidCoast, Holiday Bowl would then enter the debt-collection business, rapidly generating
new losses that would offset Holiday Bowl’s existing taxes.
After the sale, MidCoast transferred Holiday Bowl to Sequoia in exchange for the
cancellation of Sequoia’s loan and about $320,000 in cash. No one ever paid Holiday Bowl’s
outstanding taxes, and the one-time bowling company dissolved in 2006.
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The Internal Revenue Service investigated MidCoast, uncovering the Holiday Bowl sale
and about sixty similar transactions. That did not end well for MidCoast, Sequoia, and a law
firm, as a grand jury indicted several individuals associated with each of them. One defendant
pleaded guilty. Others fled the country. The government launched a civil collection proceeding
against the Hawks in pursuit of Holiday Bowl’s unpaid taxes. The Tax Court concluded that
Sequoia’s loan to MidCoast was a sham and that Holiday Bowl had simply distributed cash to
the Hawks, who were liable to the government as Holiday Bowl’s fraudulent transferees. This
appeal followed.
II.
To prevent delinquent individuals and corporations from evading taxes by transferring
their assets to other entities, Congress enacted 26 U.S.C. § 6901. The statute permits the
government to pursue a delinquent taxpayer’s transferees in federal court. Once there, the
government stands in the position of a private creditor, and state law determines whether the
transferee must pay the taxpayer’s debts. See Comm’r v. Stern, 357 U.S. 39, 47 (1958).
Two examples illustrate what § 6901 is getting at. Imagine Company A. It has
$5 million in assets that have a basis (cost) of $1 million. Let’s say Company A sells its assets (a
manufacturing plant) to Company B for cash. At that point, Company A would owe federal
taxes on the $4 million gain generated by the sale. But suppose that Company A’s owners
decide not to pay Company A’s taxes. They instead pay themselves $5 million and simply let
Company A go belly-up, leaving Company A’s taxes unpaid. That leaves a classic transferee
liability for the owners under § 6901.
What happens, however, if the owners try to avoid that liability with an intermediary
transaction? The owners sell Company A to a foreign Company C for $5 million—the exact
amount of money that Company A has in the bank. This leaves the owners with $5 million, and
Company C with $5 million in Company A, and Company A still needing to pay its taxes.
Because Company C is outside the United States, the government might not be able to pursue
Company C as a transferee when it empties Company A’s coffers and no one pays A’s taxes.
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In this setting, a court might decide that the sale of Company A had no economic substance to it,
and that the owners really transferred Company A’s cash directly to themselves.
Applied here, § 6901 prompts three questions: (1) Did Holiday Bowl owe any taxes?
(2) Are the Hawks transferees of Holiday Bowl? (3) If so, are the Hawks liable to the
government under Tennessee’s fraudulent transfer statute? See Stern, 357 U.S. at 41.
1. The Initial Taxpayer. No one disputes that Holiday Bowl incurred taxes on the sale of
its assets.
2. Transferees. The Hawks also amount to transferees. Section 6901(h) says that
transferees include a “donee, heir, legatee, devisee, and distributee.” The Hawks do not dispute
that Holiday Bowl transferred the horse farm to them under this definition. Nor could they. The
company “distribute[d]” the property to the Hawks in exchange for stock.
So too when it comes to the $3.4 million they received for the Holiday Bowl sale. But
this conclusion contains a complication or two. As the Hawks see it, they were “distributees” of
funds from MidCoast, not Holiday Bowl. As the government sees it, that transaction was a
sham, as MidCoast simply paid the Hawks with Holiday Bowl’s money, making them
distributees of funds from Holiday Bowl all the same.
All of this requires a digression about a doctrine, in truth a series of doctrines, by which
courts look to “the economic realities of the business deal” to determine whether a transaction
occurred as the taxpayer labeled it. Summa Holdings, Inc. v. Comm’r, 848 F.3d 779, 785 (6th
Cir. 2017). While taxpayers are free to arrange their affairs to minimize taxes, they must do so
in real ways—ways that give a transaction economic teeth and do not merely place tax-avoiding
labels on tax-owing transactions. Gregory v. Helvering, 293 U.S. 465, 469 (1935); Summa
Holdings, 848 F.3d at 787. Separating unlawful tax shelters from lawful tax avoidance is always
context specific and sometimes difficult to pin down.
The Tax Court permissibly refused to respect several features of the form that MidCoast
and the Hawks tried to place on this transaction. Start with the ostensibly independent financing
of it: the Sequoia loan. The Tax Court found that the Hawks didn’t even get Sequoia’s
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(ostensibly) loaned funds. They got Holiday Bowl’s own funds, which were wired into an
escrow account and promptly funneled back from the same escrow account to the Hawks. The
quintessential explanation for refusing to respect the form of a transaction is that it amounts to a
charade. What purported to be real, a Sequoia loan to MidCoast to finance the sale, was not in
fact real, as MidCoast paid for the transaction with Holiday Bowl funds.
Even aside from tracing where the dollars and cents came from and where they
eventually went, the Sequoia loan looked like an impostor on paper. Under the terms of the deal,
Sequoia had no risk because Holiday Bowl’s own cash served as the collateral for the loan. The
idea was that lenders traditionally require security for a loan. And this loan looked like it had
security. But an immediately repayable, cash-for-cash loan backed up by cash is not a traditional
loan. Money is fungible. So is air. By getting a “loan” from Sequoia, MidCoast could access
cash, which it then could immediately pay back with Holiday Bowl’s own money—in effect
using Holiday Bowl’s bank account at no risk to Sequoia. In this setting, the security was no
security at all.
It gets worse. The parties didn’t sign most of the loan documents, behavior that does not
accord with the way people usually transfer large pots of money. Interest and periodic payments
are a classic hallmark of real loans. See Roth Steel Tube Co. v. Comm’r, 800 F.2d 625, 631 (6th
Cir. 1986). But Sequoia’s loan wouldn’t incur interest unless MidCoast defaulted. While
Sequoia did stand to make about $17,250 when MidCoast paid back the loan, this translated to
annual interest of $6.3 million, nearly double what MidCoast borrowed. At dusk’s end, Holiday
Bowl distributed its money to the Hawks, in substance if not always in form, making them the
company’s transferees.
The problem by the way is not that the Hawks were trying to lower their taxes. No
American to our knowledge prefers a higher tax bill. There are other ways to express fealty to
our country. The problem is that the transaction lacked economic substance; it was nothing but
misleading labels and distracting forms—trompe l’oeil from start to finish.
Precedent, too, looks askance at what the Hawks and their advisors did. Over forty years
ago, this court faced a similar transaction, in which a shareholder sold a business holding only
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cash and tax liabilities to buyers who claimed—much like MidCoast—to be able to reduce the
business’s taxes based on existing business losses. The buyers borrowed the purchase price and
immediately liquidated the business. See Owens v. Comm’r, 568 F.2d 1233, 1236 (6th Cir.
1977). In concluding that the transaction was a sleight-of-hand distribution to the original
shareholder, Owens noted that “tax liabilities cannot be altered on the basis of parties exchanging
the most fungible commodity of all, cash.” Id. at 1240. Just so here.
The Seventh Circuit reached a similar conclusion in a similar setting. The Feldman
family owned and operated Woodside Ranch, an outdoor resort. See Feldman v. Comm’r, 779
F.3d 448, 450 (7th Cir. 2015). As here, the Feldmans decided to sell the company’s assets for
cash and incurred large capital gains taxes. Id. at 451. And as here, MidCoast entered the
picture with a promise to “pay more for the shares than they were worth,” if you simply
subtracted the tax owed from the cash that Woodside Ranch had. Id. When Woodside never
paid its taxes, the government went after the Feldmans.
The Seventh Circuit concluded that the Woodside sale was in truth a distribution to the
Feldmans. Id. at 456. Some aspects of that case, it is true, made it easier. MidCoast’s loan in
that case “was entirely undocumented.” Id. In this instance, MidCoast and Sequoia drew up
loan documents, though they never signed most of them. And in Feldman, MidCoast didn’t sell
the business to the lender; it just immediately repaid the loan. Id. But the core of Feldman and
our case remains the same: a cash swap that amounts to a distribution to the shareholders, not a
real sale.
Because the Hawks were transferees under § 6901, the government may pursue them in
federal court. That leaves the question of liability under Tennessee law.
3. Liability Under Tennessee Law. Tennessee has adopted the Uniform Fraudulent
Transfer Act, which provides remedies to creditors (like the United States) when insolvent
debtors fraudulently transfer assets to third parties. See Tenn. Code Ann. § 66-3-301 et seq. The
Act treats a transfer as fraudulent “if the debtor made the transfer . . . without receiving a
reasonably equivalent value in exchange for the transfer . . . and the debtor was insolvent at that
time or the debtor became insolvent as a result of the transfer.” Id. § 66-3-306(a). The law
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prompts three inquiries of its own: Did the Holiday Bowl transaction count as a transfer? Did
Holiday Bowl receive reasonably equivalent value in exchange? Did Holiday Bowl become
insolvent?
First, for many of the same reasons the Holiday Bowl transaction amounts to a transfer to
the Hawks under federal law, it counts as a transfer from Holiday Bowl to the Hawks under
Tennessee law. Tennessee law defines a transfer broadly to include “every mode, direct or
indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an
asset or an interest in an asset, and includes payment of money, release, lease, and creation of a
lien or other encumbrance.” Id. § 66-3-302(12). Apt is the word “indirect.” Even if the Hawks
received Sequoia’s money (which they didn’t), the Hawks still would have received Holiday
Bowl’s funds indirectly.
Tennessee courts also consider the economic substance of the Holiday Bowl transaction.
The Uniform Fraudulent Transfer Act incorporates traditional “principles of . . . equity.” Id.
§ 66-3-311. And Tennessee courts have long relied on sham-transaction principles in settings
like this one. See, e.g., CAO Holdings, Inc. v. Trost, 333 S.W.3d 73, 88 (Tenn. 2010); M. & M.
Stamp Co. v. Harris, 368 S.W.2d 752, 755 (Tenn. 1963). The Tennessee statute also directs that
it “shall be applied and construed to effectuate its general purpose to make uniform the law with
respect to the subject of this [statute] among states enacting it.” Tenn. Code Ann. § 66-3-312.
And other courts have held that the sham-transaction principles apply to other States’ Uniform
Fraudulent Transfer Acts. See, e.g., Feldman, 779 F.3d at 459 (interpreting the Wisconsin
statute); In re AFI Holding, Inc., 525 F.3d 700, 708 (9th Cir. 2008) (interpreting the California
statute).
Second, Holiday Bowl didn’t receive reasonably equivalent value for the horse farm or
the cash that the company transferred to the Hawks. The Act defines value as “property”
transferred or “an antecedent debt . . . secured.” Tenn. Code Ann. § 66-3-304(a). When the
Hawks exchanged stock for the horse farm, the transaction merely subtracted from Holiday
Bowl’s balance sheet. And Holiday Bowl got nothing when the Hawks received their $3.4
million.
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Third, Holiday Bowl also became insolvent due to this transaction. After the Hawks
received their cash back, Holiday Bowl had only about two-thirds of the money that it needed to
pay its outstanding taxes.
Nancy Sue Hawk and Billy’s estate resist this conclusion on several grounds.
They say that the Tennessee courts wouldn’t look to the reality of the transaction to
determine what happened. CAO Holdings, Inc. v. Trost proves otherwise. 333 S.W.3d 73 (Tenn.
2010). The Tennessee Supreme Court remanded a case at summary judgment to determine
whether a transaction was a sham. Id. at 88–90. While it’s true that one unpublished Tennessee
Court of Appeals case declared that “[n]o Tennessee court has applied the economic substance
doctrine,” the petitioners read too much into the comment. Niuklee, LLC v. Comm’r, Tenn.
Dep’t of Revenue, No. M2014-01644-COA-R3-CV, 2015 WL 6941593, at *7 (Tenn. Ct. App.
Nov. 9, 2015). It’s clear that Tennessee courts have applied equitable principles to scrutinize the
economic realities of transactions in a variety of situations.
The Hawks take issue with the Tax Court’s conclusion that they knew about MidCoast’s
fraudulent scheme. But Tennessee courts look to the economic realities of the transaction
regardless of whether the Hawks knew about the fraud. When it comes to constructive fraud,
Tennessee’s Uniform Fraudulent Transfer Act doesn’t require the transferee to know about the
debtor’s misconduct. Instead, transferees who deal in good faith can offset their liability by
whatever they paid the debtor for the transferred asset—that is, by whatever money they added to
the pool available to creditors. But acting in good faith without more doesn’t preclude transferee
liability. See Tenn. Code Ann. § 66-3-309(d).
Some history shows why. The Uniform Fraudulent Transfer Act replaced an older model
statute, which had required that creditors prove transferees received an asset from a debtor
“without a fair consideration.” Unif. Fraudulent Conveyance Act § 4 (Unif. Law Comm’n
1918). The former Act defined “fair consideration” as the exchange of property “in good faith.”
Id. § 3. According to official comments to the new Fraudulent Transfer Act, the drafters of that
statute intentionally replaced the words “fair consideration” with “reasonably equivalent value”
to eliminate any inquiry into the transferee’s intent when determining whether a transfer is
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constructively fraudulent. See Tenn. Code Ann. §§ 66-3-305 cmt. 2, 66-3-306 cmt. 1; see also
id. § 66-3-313 (directing courts to the official comments).
Other courts have said that constructive fraud under the Fraudulent Transfer Act can be
established without determining whether the transferee acted in good faith. See Feldman,
779 F.3d at 459–60; Weintraut v. Comm’r, 112 T.C.M. 122, 2016 WL 4040793, at *72
(T.C. 2016); Thompson v. Hanson, 239 P.3d 537, 541 (Wash. 2009); see also Shockley v.
Comm’r, 872 F.3d 1235, 1254 n.17 (11th Cir. 2017).
As for cases in which the recharacterization of the transaction and thus constructive fraud
turned on showing that the transferees knew about the sketchiness of the tax shelter, they either
applied the Uniform Fraudulent Conveyance Act or relied on cases that interpreted the older Act.
See, e.g., Diebold Found., Inc. v. Comm’r, 736 F.3d 172, 186 (2d Cir. 2013) (interpreting
Uniform Fraudulent Conveyance Act); Salus Mundi Found. v. Comm’r, 776 F.3d 1010, 1020
(9th Cir. 2014) (following Diebold to interpret the same Uniform Fraudulent Conveyance Act);
Starnes v. Comm’r, 680 F.3d 417, 433 n.10 (4th Cir. 2012) (imposing a knowledge requirement
in a Uniform Fraudulent Transfer Act case while citing a Fraudulent Conveyance Act case); see
also Frank Sawyer Tr. v. Comm’r, 712 F.3d 597, 605 (1st Cir. 2013) (applying state-specific
equity law to interpret the Uniform Fraudulent Transfer Act).
The bottom line? The Hawks’ “extensive emphasis on their due diligence and lack of
knowledge of illegality” doesn’t shield them from the sham nature of the transaction and absolve
them of transferee liability. Feldman, 779 F.3d at 460. That’s the same conclusion the Seventh
Circuit reached in Feldman, another MidCoast case, one that applied Wisconsin law and its
Uniform Fraudulent Transfer Act. Id.
Switching gears, the Hawks claim that Sequoia’s loan wasn’t a sham, pointing to
provisions in the deal documents that ostensibly prevented the escrow agent from wiring Holiday
Bowl’s cash directly to them. But one point of the sham-transaction doctrine is to look at what
happened in fact, not what happened on paper.
To similar effect, the Hawks claim that the lack of signatures on the loan documents did
not delegitimate the loan. That may be true. But that truth does not take away from the reality
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that prudent lenders in traditional transactions normally do not let such papers go unsigned or the
reality that sloppiness often arises when no risk exists. So it was with this “loan.”
The Hawks claim that MidCoast’s $17,250 payment to Sequoia constituted a loan fee,
proving that there was economic substance to the loan. The better reading is the one the Tax
Court gave: that the fee compensated Sequoia for participating in the scheme. Even on its own
terms, the loan didn’t generate interest unless MidCoast defaulted, not a traditional way to
calculate loan interest. A conventional approach to calculating interest would have made the
$17,250 amount usurious in the extreme—about a 183% annual rate.
The Hawks persist that a series of transactions shows that Sequoia made a real loan.
Over a week before the Holiday Bowl sale, Sequoia placed $35 million into a separate money
market account with the same escrow agent. The day after the Holiday Bowl sale, the agent
moved much of that money into the escrow account used for the Holiday Bowl transaction. The
escrow agent then transferred $4 million to a company called Delta Trading Partners, at the
purported “instructions of Holiday Bowl’s newly appointed president.” J.A. 3 at 455.
But none of this requires overturning the Tax Court’s finding that the transaction lacked
meat on the bones. For one thing, the Tax Court found the escrow agent’s records unreliable,
and the Hawks admit that some of the handwritten ledgers were “incorrect” and conflicted with
typed ledgers. Reply Br. 9. For another, the Hawks didn’t receive a portion of the $35 million.
As shown above, they received Holiday Bowl’s money in the escrow account. For still another,
even if the Sequoia loan had occurred, that doesn’t change the underlying reality of what
happened. From an economic standpoint, Sequoia could have sent the Hawks Sequoia’s money
and then transferred Holiday Bowl’s cash to Delta Trading Partners. Or Sequoia could have sent
the Hawks Holiday Bowl’s funds and used its own money to pay Delta Trading Partners. Either
way, Sequoia’s “loan” bore no risk, the Hawks received the same amount, and so did Delta
Trading Partners.
The Hawks take aim at the Tax Court’s conclusion that this transaction rendered Holiday
Bowl insolvent. They attempt to argue that the escrow agent didn’t wire Holiday Bowl’s money
to them. Escrow accounts like this one often hold funds for more than one client at once. The
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Hawks encourage us to use first-in-first-out accounting and conclude that they received other
clients’ funds unrelated to the Holiday Bowl sale, leaving much of Holiday Bowl’s money
untouched in the escrow account. Whatever the value of the first-in-first-out accounting method
to disentangle intermingled assets, however, the Tax Court could identify which deposits and
payments corresponded to the Holiday Bowl transaction. No convincing basis for overturning
that finding has emerged. What’s more, even if we apply first-in-first-out accounting, the
problem does not go away. If Holiday Bowl benefited from the transfer of other clients’ money,
it would remain on the hook to the true owners, making Holiday Bowl insolvent all the same.
Along the same lines, the Hawks point to Sequoia’s post-sale movement of money into
the escrow account and the $4 million wire to Delta Trading Partners as indicating that Holiday
Bowl controlled $4 million before Sequoia liquidated the company. But that assumes Sequoia’s
loan to MidCoast (and its other attempts to shift funds) were not shams or devoid of economic
substance. The assumption does not hold.
Last of all, the Hawks point to Alterman v. Commissioner, a MidCoast case in which the
Tax Court refused to collapse the transaction under Florida’s Uniform Fraudulent Transfer Act.
110 T.C.M. 507, 2015 WL 7753344, at *23 (T.C. 2015). But the Tax Court in Alterman
required the government to prove that the sellers knew about the fraud based on another Tax
Court decision applying prior Conveyance Act case law. Id. at *17. That ignored the purpose of
constructive fraud under the Transfer Act: to remove knowledge from the equation.
***
For those readers still with us, you might wonder: Was there a way to make this
tax-reduction strategy work? Was it ever possible for MidCoast to offset Holiday Bowl’s taxes
with net operating losses, say by making the Sequoia loan a kosher one and dotting another “i”
and crossing another “t” in the underlying transactions? The answer is “maybe” in the abstract
and “not likely” here.
As one treatise puts it, “Congress, with assistance from the courts, has constructed a
formidable defense against taxpayer efforts to traffic in net operating losses and other corporate
tax benefits.” Boris I. Bittker & James S. Eustice, Federal Income Taxation of Corporations and
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Shareholders § 14.02 (7th ed. 2019). The Internal Revenue Code prevents a company with pre-
existing losses from purchasing a company with pre-existing gains and canceling the two out
within five years of the sale. See 26 U.S.C. § 384; Bittker & Eustice, supra, § 14.45.
That’s why MidCoast told the Hawks that it would operate Holiday Bowl as a
debt-collection business and generate new losses within Holiday Bowl—a different strategy from
the one the broker originally proposed. For this scheme to eliminate Holiday Bowl’s 2003 taxes,
it appears, the new losses needed to arise between the November 2003 sale and the end of the
year. After hearing the evidence, the Tax Court concluded that “[i]t was not plausible” that a
MidCoast-owned Holiday Bowl could ever incur the necessary “offsetting expenses” in time.
J.A. 3 at 481.
That reality and others too separate this case from Summa Holdings, Inc. v.
Commissioner, 848 F.3d 779 (6th Cir. 2017). Those taxpayers sought to take advantage of two
investment vehicles—a “domestic international sales corporation” and a Roth IRA. The former
allows an exporter to shelter certain income from corporate tax. Id. at 782. The latter allows
individuals to save limited amounts tax free. Id. at 783. Done together, a Roth IRA owning
shares in a domestic international sales corporation permits taxpayers to transfer (and potentially
grow) many assets in their Roth IRAs and spare themselves considerable taxes. Id.
That’s exactly what the Summa Holdings taxpayers did. Citing the substance-over-form
doctrine, however, the Commissioner claimed authority to ignore the form of the legislatively
approved transactions. We disagreed because “[the] Internal Revenue Code allowed” the
taxpayers “to do what they did.” Id. at 784. Courts (and agencies) must respect a statute’s text,
and the Commissioner’s revision took the substance-over-form doctrine a “step too far.” Id. at
785. The Commissioner, we acknowledged, may “honor the fiscal realities of what taxpayers
have done over the form in which they have done it.” Id. But neither the Commissioner in
particular nor the Executive Branch in general may rewrite “the meaning of statutes” whenever it
dislikes the law. Id.
Think about it. Everyone in Summa Holdings agreed that the plain terms of the relevant
statutes permitted the transaction. Id. at 784. Not even Chevron permits government agencies to
No. 18-1534 Billy F. Hawk, Jr., GST Non-Exempt Page 14
Marital Trust et al. v. Comm’r
ignore the plain text of a statute. Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S.
837, 842–43 (1984). What, then, made the Internal Revenue Service think it could ignore the
plain text of a statute—one that other agencies could not override under Chevron—under the
substance-over-form doctrine? This version of the doctrine makes Chevron look like a modest
assumption of executive power. When all was said and done, Summa Holdings was a case in
which the taxpayers forced the government to play it straight—to make it respect the form and
substance of the laws Congress wrote.
That leaves two sides to the substance and form coin. On one side is Summa Holdings.
If Congress authorizes taxpayers to do something—in Summa Holdings, employing
Code-compliant “shell corporations . . . that have no economic substance”—the Commissioner
can’t override the constitutional forces of bicameralism and presentment. Summa Holdings,
898 F.3d at 786. On the other side is the Hawks’ case. The government isn’t seeking to ignore
the form of the Code today. It’s enforcing the statutes as written. No one disputes that Holiday
Bowl owed taxes that the Code imposes. The Code places substantial limits on even the above-
board version of this transaction, limits that foreclosed MidCoast’s ability to offset Holiday
Bowl’s pre-existing gains. What’s more, § 6901 provides a mechanism for the government to
pursue a delinquent taxpayer’s assets in cases just like this one. Tennessee law seeks a similar
end. All in all, the Commissioner isn’t disregarding statutory text in the name of economic
substance; he’s honoring the written word and the economic realities of this transaction.
We affirm.