Slone Revocable Trust v. Cir

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
JAMES C. SLONE; NORMA L. SLONE; No. 12-72464
SLONE REVOCABLE TRUST; UA
DATED SEPTEMBER 20, 1994; Tax Ct. No.
TRANSFEREE, 6632-10
Petitioners-Appellees,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellant.
NORMA L. SLONE, No. 12-72495
Petitioner-Appellee,
Tax Ct. No.
v. 6629-10
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellant.
2 SLONE V. CIR
SLONE FAMILY GST TRUST, No. 12-72496
Petitioner-Appellee,
Tax Ct. No.
v. 6630-10
COMMISSIONER OF INTERNAL
REVENUE,
Respondent-Appellant.
JAMES C. SLONE, No. 12-72497
Petitioner-Appellee,
Tax Ct. No.
v. 6631-10
COMMISSIONER OF INTERNAL
REVENUE, ORDER AND
Respondent-Appellant. AMENDED
OPINION
Appeal from a Decision of the
United States Tax Court
Argued and Submitted
November 21, 2014—San Francisco, California
Filed June 8, 2015
Amended August 28, 2015
SLONE V. CIR 3
Before: John T. Noonan and Sandra S. Ikuta, Circuit
Judges and William H. Albritton, III,* Senior District
Judge.
Order;
Opinion by Judge Ikuta;
Partial Concurrence and Partial Dissent by Judge Noonan
SUMMARY**
Tax
The panel vacated and remanded a decision by the Tax
Court on a petition for redetermination of federal income tax
deficiency involving an asset and stock sale.
Slone Broadcasting Co. sold its assets to Citadel
Broadcasting Co. Slone’s shareholders then sold their shares
to Berlinetta, Inc., which changed its name to Arizona Media
and was later administratively dissolved for failure to file an
annual report. The Internal Revenue Service sent notices of
tax liability to the former shareholders of Slone Broadcasting,
claiming that they were liable as “transferees” for taxes owed
on Slone Broadcasting’s asset sale, under 26 U.S.C. § 6901,
and that the IRS could disregard the form of the stock sale
*
The Honorable William H. Albritton III, Senior District Judge for the
U.S. District Court for the Middle District of Alabama, sitting by
designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
4 SLONE V. CIR
because the substance of the transaction was that Slone
Broadcasting dissolved upon selling its assets, then
distributed those assets to its shareholders through the stock
sale. The Tax Court determined that the stock sale was a
legitimate transaction whose form must be respected.
The panel held that the Tax Court applied an incorrect test
in making this determination. The panel explained that, when
the Commissioner of Internal Revenue claims a taxpayer was
“the shareholder of a dissolved corporation” for purposes of
§ 6901, but the taxpayer did not receive a liquidating
distribution if the form of the transaction is respected, a court
must consider the relevant subjective and objective factors to
determine whether the formal transaction “had any practical
economic effects other than the creation of income tax
losses.” The panel remanded for the Tax Court to apply the
proper legal standard under Comm’r v. Stern, 357 U.S. 39
(1958).
Judge Noonan concurred in part and dissented in part. He
concluded that the record is sufficient to reach the merits of
the first prong of the Stern test, and would hold that the stock
sale transaction had no economic substance and that the
shareholders are transferees under § 6901. He would remand
only on the question of state law substantive liability (the
second prong of Stern).
SLONE V. CIR 5
COUNSEL
Arthur T. Catterall (argued) and Francesca Ugolini (argued),
Assistant United States Attorneys; Kathryn Keneally,
Assistant Attorney General; Tamara W. Ashford, Deputy
Assistant Attorney General; Gilbert S. Rothenberg and
Kenneth L. Greene, Attorneys, Tax Division, United States
Department of Justice, Washington, D.C., for Respondent-
Appellant.
Stephen E. Silver (argued), Jason M. Silver, and David R.
Jojola, Silver Law PLC, Scottsdale, Arizona, for Petitioners-
Appellees.
ORDER
The opinion filed June 8, 2015, and appearing at 788 F.3d
1049, is hereby amended as follows:
On page 1053, the second sentence of the penultimate
paragraph and the final paragraph should be deleted and
replaced with the following:
The test for this second prong depends on the
law of the state where the transfer occurred.
See, e.g., id. (“Under the [New York Uniform
Fraudulent Conveyance Act], a party seeking
to recharacterize a transaction must show that
the transferee had ‘actual or constructive
knowledge of the entire scheme that renders
[its] exchange with the debtor fraudulent.’”)
(alterations in original) (quoting Diebold
Found., Inc. v. Comm’r, 736 F.3d 172,
6 SLONE V. CIR
184–85 (2d Cir. 2013)). The two Stern test
prongs “are separate and independent
inquiries.” Salus Mundi, 776 F.3d at 1012.
With this amendment, the petition for rehearing, filed July
16, 2015, is DENIED. No further petitions for rehearing or
rehearing en banc will be entertained.
OPINION
IKUTA, Circuit Judge:
This appeal involves two sales. First, Slone Broadcasting
Co. sold essentially all of its assets to Citadel Broadcasting
Co. for $45 million. The shareholders of Slone Broadcasting
then sold all their shares to Berlinetta, Inc. for $33 million.
The substance of the stock sale, according to the
Commissioner of the Internal Revenue Service (IRS), is that
the shareholders received a liquidating distribution from the
corporation. The Commissioner contends that the form of
this transaction should be disregarded for federal tax law
purposes. The shareholders, in turn, claim that the transaction
was a legitimate stock sale transaction and its form must be
respected. The tax court agreed with the shareholders. On
appeal, we conclude that the tax court applied an incorrect
test in holding that it would respect the form of the stock sale.
I
Slone Broadcasting Co., a radio broadcasting business,
had two shareholders: the Slone Revocable Trust, for which
James C. Slone and his wife Norma L. Slone were trustees,
SLONE V. CIR 7
and the Slone Family GST Trust, for which John Barkley was
the sole trustee. On December 21, 2000, Slone Broadcasting
entered into an asset purchase agreement with Citadel
Broadcasting Co., in which Citadel agreed to pay $45 million
for all assets of the radio stations owned and operated by
Slone Broadcasting. The transaction closed in July 2001.
Because Slone Broadcasting’s basis in these assets was $6.4
million, Slone Broadcasting realized a capital gain of
approximately $38.6 million and incurred an estimated
federal and state income tax liability of $15.3 million. The
corporation did not make any distributions to the
shareholders. In October 2001, Slone Broadcasting made its
first federal income tax payment of $3.1 million to the IRS
for the tax year ended June 30, 2002.
Before the transaction with Citadel closed, Fortrend
International, LLC expressed an interest in a merger deal with
Slone Broadcasting. Fortrend proposed purchasing all of
Slone Broadcasting’s shares for $29.8 million, and then
restructuring the company to engage in the asset recovery
business. Slone Broadcasting’s shareholders investigated
whether Fortrend and its offer were legitimate. A tax
attorney hired by the shareholders confirmed that Fortrend’s
business plan projections were reasonable, and he consulted
with an industry expert to confirm that Fortrend and its third-
party service provider were reputable and were represented
by well-regarded accounting and law firms. When the
shareholders asked for information regarding the methods it
would use to reduce the shareholders’ tax liability, Fortrend
would not respond, claiming its methods were proprietary.
Nevertheless, Fortrend assured Slone Broadcasting that the
transaction would not be a “listed transaction” pursuant to
IRS Notice 2001-51, 2001-2 C.B. 190, which specifies tax
avoidance transactions that must be disclosed or registered.
8 SLONE V. CIR
On December 10, 2001, the Slone Broadcasting shareholders
agreed to sell all the shares of Slone Broadcasting to
Berlinetta, Inc., a Fortrend affiliate, for $35.8 million.
Berlinetta agreed to assume Slone Broadcasting’s income tax
liability. The shareholders, Slone Revocable Trust and the
Slone Family GST Trust, received cash payments of $31
million and $2.6 million, respectively, from the sale.
After closing, Slone Broadcasting merged with Berlinetta.
The new company changed its name to Arizona Media
Holdings, Inc. On December 13, 2001, a shareholder of
Arizona Media contributed Treasury bills with a basis of
$38.1 million to the new company. Arizona Media then sold
the bills for $108,731. Arizona Media filed its tax return for
the tax year ended June 30, 2002, reporting a $37.9 million
gain from the asset sale and an offsetting loss of $38 million
from the Treasury bill sale. Arizona Media claimed it had no
income tax liability, and requested a refund for the $3.1
million tax payment made by Slone Broadcasting. The IRS
granted this refund.
The IRS began investigating Arizona Media in March
2005. The IRS assessed a tax deficiency for taxes due on
Slone Broadcasting’s December 2000 sale of assets to Citadel
in the amount of $13.5 million in 2008, along with a penalty
of $2.7 million and interest of $7.3 million.1 Arizona Media
failed to pay any of the assessed tax, penalty, or interest. In
August 2009, the state of Arizona administratively dissolved
Arizona Media for failure to file an annual report.
1
Arizona Media had agreed to extend the limitations period in which the
IRS could assess tax liability through May 2008.
SLONE V. CIR 9
After failing to collect the tax deficiency from Arizona
Media, the IRS sent notices of liability to the former
shareholders of Slone Broadcasting. The notices claimed that
the shareholders were liable for the taxes owed on Slone
Broadcasting’s sale of assets to Citadel because the
shareholders were “transferees” of Slone Broadcasting for
purposes of 26 U.S.C. § 6901. (Section 6901 authorizes the
IRS to require a transferee of assets to pay the unpaid taxes
owed by the transferor under certain circumstances.) The IRS
took the position that it could disregard the form of the
shareholders’ sale of Slone Broadcasting stock to Berlinetta.
Instead, according to the IRS, the substance of the transaction
was that Slone Broadcasting dissolved upon selling its assets
to Citadel, and then distributed those assets to its shareholders
through the Fortrend transaction.
The shareholders filed petitions for review of this
determination in tax court, arguing that the form of the stock
sale transaction to Berlinetta should be respected, and
therefore the shareholders were not “transferees” of Slone
Broadcasting’s assets under § 6901.
The tax court agreed, holding that “[w]e will respect the
form of the transactions in this case.” It first found that the
asset sale between Slone Broadcasting and Citadel was
genuinely independent from the stock sale between Slone
Broadcasting and Berlinetta, and that there was no evidence
that the Slone Broadcasting shareholders conducted the asset
sale as the first step in a tax scheme to offset the potential
capital gains from the sale. Second, the court found that the
Slone Broadcasting shareholders neither knew, nor should
have known, that Fortrend and Berlinetta were involved in an
illegitimate tax evasion scheme. The court noted that when
the shareholders asked for more information about Fortrend’s
10 SLONE V. CIR
methods for offsetting gains from the asset sale, they were
told that the methods were proprietary. The court concluded
that the shareholders had no duty to conduct further
investigation, and no responsibility for any tax strategies
adopted by Berlinetta after the transaction closed.
Based on these findings and conclusions, the tax court
held that neither the substance over form doctrine, nor any
related doctrine, required the tax court to “recast the stock
sale as a liquidating distribution.”2 The tax court concluded
that the form of the stock sale between the shareholders and
Berlinetta should be respected, and therefore rejected the
IRS’s theory that the shareholders were liable for taxes,
interest, and penalties arising from Slone Broadcasting’s sale
of its assets. The Commissioner timely appealed.
II
We have jurisdiction over this appeal under I.R.C.
§ 7482(a)(1). We review a tax court’s factual determinations
for clear error and its application of legal standards de novo.
See Sacks v. Comm’r, 69 F.3d 982, 986 (9th Cir. 1995).
Because a tax court must apply the correct legal standards
when it characterizes a transaction for tax purposes, see id.,
we reject the shareholders’ argument that such a
characterization raises only questions of fact.
2
The tax court held that the Commissioner had waived an alternative
argument that the stock sale should be disregarded for tax purposes under
the economic substance doctrine, but did not explain the difference
between this doctrine and the “substance over form” doctrine which it
considered. As explained below, any subtle differences between these
doctrines is not relevant for our analysis here.
SLONE V. CIR 11
A
The question before us is whether the Slone Broadcasting
shareholders can be held liable for taxes on Slone
Broadcasting’s sale of assets to Citadel because the
shareholders were “transferees” of the proceeds of that sale.
Under 26 U.S.C. § 6901, the Commissioner can assess tax
liability against a taxpayer who is “the transferee of assets of
a taxpayer who owes income tax.” Salus Mundi Found. v.
Comm’r, 776 F.3d 1010, 1017 (9th Cir. 2014). Tax liabilities
on transferred assets shall, with certain exceptions, be
“assessed, paid, and collected in the same manner and subject
to the same provisions and limitations as in the cases of taxes
with respect to which the liabilities were incurred.”
26 U.S.C. § 6901.
While federal law provides the procedure for collecting
tax liabilities from a transferee, state law answers the
question whether the alleged transferee is substantively liable
for the tax. Comm’r v. Stern, 357 U.S. 39, 44–45 (1958).
Therefore, in order to impose tax liability on a transferee, a
court must engage in a two-pronged inquiry, see Salus Mundi,
776 F.3d at 1018 (citing Stern, 357 U.S. at 42, 44–45), which
is sometimes called the Stern test. The first prong asks: “is
the party a ‘transferee’ under § 6901 and federal tax law?”
Id. Under federal law, a “transferee” is defined as including
a “donee, heir, legatee, devisee, [or] distributee.” 26 U.S.C.
§ 6901(h). Treasury regulations further define the term
“transferee” to include “the shareholder of a dissolved
corporation.” 26 C.F.R. § 301.6901-1(b).
The second prong of the Stern test asks: “is the party
substantively liable for the transferor’s unpaid taxes under
12 SLONE V. CIR
state law?” Salus Mundi, 776 F.3d at 1018. The test for this
second prong depends on the law of the state where the
transfer occurred. See, e.g., id. (“Under the [New York
Uniform Fraudulent Conveyance Act], a party seeking to
recharacterize a transaction must show that the transferee had
‘actual or constructive knowledge of the entire scheme that
renders [its] exchange with the debtor fraudulent.’”)
(alterations in original) (quoting Diebold Found., Inc. v.
Comm’r, 736 F.3d 172, 184–85 (2d Cir. 2013)). The two
Stern test prongs “are separate and independent inquiries.”
Salus Mundi, 776 F.3d at 1012.
B
The Commissioner argues that the tax court erred in
analyzing the first prong of the Stern test: whether the
shareholders are “transferees” as “shareholder[s] of a
dissolved corporation.” 26 C.F.R. § 301.6901-1(b). The
parties do not dispute that if the form of the stock sale
transaction between the shareholders and Berlinetta is
respected, the shareholders did not receive a liquidating
distribution from a dissolved corporation, and therefore were
not transferees of Slone Broadcasting’s assets (or liable for
Slone Broadcasting’s taxes). Therefore, the crucial question
is whether the tax court erred in respecting the form of the
shareholders’ stock sale to Berlinetta for federal tax purposes
under the first prong of the Stern test, leaving it unnecessary
for the tax court to analyze the shareholders’ substantive
liability under state law under the second prong of the Stern
test.
Although we have not previously considered how a court
should analyze a transaction for purposes of transferee
liability under § 6901, both the Supreme Court cases, and our
SLONE V. CIR 13
own precedent, require us to look through the form of a
transaction to consider its substance. The Supreme Court has
long recognized “the importance of regarding matters of
substance and disregarding forms,” United States v. Phellis,
257 U.S. 156, 168 (1921), because “[t]he incidence of
taxation depends upon the substance of a transaction,”
Comm’r v. Court Holding Co., 324 U.S. 331, 334 (1945). In
explaining the factors that should guide a court’s analysis
regarding when it is appropriate to disregard the form of a
transaction, the Supreme Court framed the inquiry as whether
“there is a genuine multiple-party transaction with economic
substance which is compelled or encouraged by business or
regulatory realities, is imbued with tax-independent
considerations, and is not shaped solely by tax-avoidance
features that have meaningless labels attached.” Frank Lyon
Co. v. United States, 435 U.S. 561, 583–84 (1978).
We have interpreted Frank Lyon as requiring courts to
consider both subjective and objective factors in
characterizing a transaction for tax purposes. See Casebeer
v. Comm’r, 909 F.2d 1360, 1362–63 (9th Cir. 1990). We
have used different terminology from time to time, but
consistently apply the same approach. In Casebeer, we
applied “a two-part test for determining whether a transaction
is a sham: 1) has the taxpayer shown that it had a business
purpose for engaging in the transaction other than tax
avoidance? 2) has the taxpayer shown that the transaction had
economic substance beyond the creation of tax benefits?” Id.
at 1363 (citing Bail Bonds by Marvin Nelson, Inc. v. Comm’r,
820 F.2d 1543, 1549 (9th Cir. 1987)); see also Sacks, 69 F.3d
at 987–88 (considering subjective and objective factors in
analyzing whether a transaction was a sham). Similarly, in
Reddam v. Commissioner, we applied the “economic
substance doctrine,” which likewise focused on two prongs:
14 SLONE V. CIR
“the subjective aspect of whether the taxpayer intended to do
anything other than acquire tax deductions, and the objective
aspect of whether the transaction had any economic substance
other than creation of tax benefits.” 755 F.3d 1051, 1059 (9th
Cir. 2014) (quoting Sacks, 69 F.3d at 987). Finally in Stewart
v. Commissioner, we referred to the “substance-over-form
doctrine” as part of a well-established body of common law
that included consideration of a transaction’s “business
purpose” and “economic reality.” 714 F.2d 977, 987–88 (9th
Cir. 1983).
In determining whether to disregard the form of a
transaction, we do not conduct a “rigid two-step analysis”
applying the subjective and objective factors, but rather focus
“holistically on whether the transaction had any practical
economic effects other than the creation of income tax
losses.” Reddam, 755 F.3d at 1060 (internal quotation marks
and emphasis omitted); see also Sacks, 69 F.3d at 987–92
(looking at a transaction as a whole to determine whether it
was a sham). If a common sense review of the transaction
leads to the conclusion that a particular transaction does not
have a non-tax business purpose or “any economic substance
other than creation of tax benefits,” Reddam, 755 F.3d at
1059 (internal quotation mark omitted), the form of that
transaction may be disregarded, and the Commissioner may
rely on its underlying economic substance for tax purposes.
This approach to characterizing a transaction for tax
purposes, considering both subjective and objective factors,
is also used by other circuits, although they too describe in it
varying ways. See, e.g., Feldman v. Comm’r, 779 F.3d 448,
454 (7th Cir. 2015) (noting that the “animating principle” of
each of “several related, overlapping doctrines used in tax
cases,” including “the ‘substance over form’ doctrine, the
SLONE V. CIR 15
‘business purpose’ doctrine, [and] the ‘economic substance’
doctrine,” is that “the law looks beyond the form of a
transaction to discern its substance”). As Feldman noted,
“[t]he distinctions between these doctrines are subtle, if they
exist at all.” Id. at 454 n.6; see also Bittker and Lokken,
Federal Taxation of Income, Estates and Gifts ¶ 4.3.4A (3d
ed. Supp. 2014) (noting that the substance over form doctrine,
the business purpose doctrine, the economic substance
doctrine, and the sham transaction doctrine have tended to
coalesce in the case law).3 Congress has codified a similar
approach considering subjective and objective factors.4
We conclude that this approach is applicable for
determining whether a taxpayer is a transferee for purposes
of § 6901. Accordingly, when the Commissioner claims a
taxpayer was “the shareholder of a dissolved corporation” for
purposes of 26 C.F.R. § 301.6901-1(b), but the taxpayer did
not receive a liquidating distribution if the form of the
transaction is respected, a court must consider the relevant
subjective and objective factors to determine whether the
formal transaction “had any practical economic effects other
3
But see Altria Grp., Inc. v. United States, 658 F.3d 276, 291 (2d Cir.
2011) (stating, without explanation, that “[t]he substance over form
doctrine and the economic substance doctrine are independent bases to
deny a claimed tax deduction”).
4
In 2010, Congress revised 26 U.S.C. § 7701 to clarify that a transaction
has economic substance when: (1) the transaction meaningfully changes
the taxpayer’s economic position and (2) the taxpayer has a substantial
purpose for entering into the transaction. Health Care and Education
Reconciliation Act of 2010, Pub. L. No. 111-152, § 1409(a), 124 Stat.
1029 (2010). This provision applies only to transactions entered into after
March 30, 2010, id. § 1409(e), and is therefore inapplicable to the Slone
Broadcasting transaction.
16 SLONE V. CIR
than the creation of income tax losses.” Reddam, 755 F.3d at
1060 (internal quotation mark omitted).
C
We now apply these principles to the question whether
the tax court erred in holding that the Commissioner could
not impose the tax liability of Slone Broadcasting/Arizona
Media on the Slone Broadcasting shareholders. According to
the Commissioner, the tax court should have found that the
“objective economic realities” establish that the stock sale
between the shareholders and Berlinetta was in substance a
liquidating transaction. Further, the Commissioner asserts
that the tax court should have found that Slone Broadcasting
was a “shell with nothing but cash and significant tax
liabilities” when the shareholders sold the stock, because it
had no ongoing business activities, no contractual obligations,
and no debts aside from its tax liability. The Commissioner
concludes that the stock sale was effectively a liquidation of
the company, terminating its business operations and leaving
the shareholders with cash.
Not surprisingly, the Slone Broadcasting shareholders
disagree. They claim that after its asset sale to Citadel, Slone
Broadcasting retained the human capital and resources to
acquire another radio station, and therefore was not a “lifeless
shell” at the time of its stock sale to Berlinetta. The
shareholders also argue that they had no improper tax
avoidance purposes for entering into the sale. Further, the
shareholders assert that the stock sale had economic
substance because Fortrend/Berlinetta actively engaged in
debt recovery after the sale.
SLONE V. CIR 17
We cannot resolve this dispute because the tax court
failed to apply the correct legal standard for characterizing
the stock sale transaction for the purposes of federal
transferee liability. The court did not address either the
subjective or objective factors we apply in characterizing a
transaction for tax purposes, as it failed to make any finding
on whether the shareholders had a business purpose for
entering into the stock purchase transaction other than tax
avoidance, or whether the stock purchase transaction had
economic substance other than shielding the Slone
Broadcasting shareholders from tax liability. Instead, the tax
court focused its factual inquiry and analysis on factors that
might be relevant to the second prong of the Stern test for
assessing transferee liability, whether a party is substantively
liable for the transferor’s unpaid taxes as a matter of state
law. For instance, the tax court’s findings that the
shareholders had not orchestrated the asset sale and the stock
sale as a single scheme for tax evasion purposes, that
Fortrend and its third-party service provider were legitimate
players in the debt collection industry, and that the
shareholders had no reason to believe that Fortrend was using
illegitimate tax evasion methods and had no duty to inquire
further all relate to the question whether the shareholders
lacked actual or constructive knowledge of the entire tax
evasion scheme that rendered their transaction with Fortrend
fraudulent under state law. See Salus Mundi, 776 F.3d at
1020. But the tax court did not use these factual findings to
analyze the shareholders’ liability under the applicable state
law; it instead concluded, based on these findings, that the
form of the stock sale should be respected for the
shareholders’ transferee status under the first prong of the
Stern test. This was an error.
18 SLONE V. CIR
Because the tax court applied the wrong legal standard to
the question of transferee liability, it failed to make findings
relating to the relevant factors for determining whether the
Commissioner could properly disregard the form of the
transaction. The tax court should make these determinations
in the first instance. See Lewis v. Comm’r, 560 F.2d 973, 978
(9th Cir. 1977) (reversing and remanding when the tax court
did not make proper factual findings). On remand, the tax
court should make the findings necessary to apply the Stern
test correctly. Under the first prong of this test, the tax court
should apply the relevant subjective and objective factors to
determine whether the Commissioner erred in disregarding
the form of the transaction in order to impose tax liability on
the shareholders as “transferees” under § 6901. Under the
second prong of the Stern test, the tax court should analyze
whether the shareholders are liable under state law for Slone
Broadcasting/Arizona Media’s unpaid tax liability. See Salus
Mundi, 776 F.3d at 1018, 1020. The tax court may begin its
analysis with either prong. The Commissioner may hold the
shareholders liable as “transferees” under § 6901 only if both
prongs of the Stern test are satisfied. See id.5
VACATED AND REMANDED.
NOONAN, Circuit Judge, concurring in part and dissenting
in part:
I concur in parts I-IIB of the opinion. I write separately
because I conclude that the record is sufficient to reach the
5
Costs are awarded to the Commissioner.
SLONE V. CIR 19
merits of the federal law inquiry under 26 U.S.C. § 6901. I
would hold that the transaction between Slone Broadcasting
and Berlinetta had no economic substance and that the Slone
Broadcasting shareholders are transferees under 26 U.S.C.
§ 6901. Therefore, I would remand to the Tax Court only on
the question of state law substantive liability.
The Supreme Court has stated that “[t]he general
characterization of a transaction for tax purposes is a question
of law subject to review,” even though “[t]he particular facts
from which the characterization is to be made are not so
subject.” Frank Lyon Co. v. United States, 435 U.S. 561, 581
n.16 (1978). As the opinion correctly articulates, the standard
in this circuit is that “[t]he Tax Court’s factual determinations
about a transaction’s economic substance are reviewed for
clear error, but the legal standards it applies and the
application of those standards to the facts are reviewed de
novo.” Reddam v. Comm’r, 755 F.3d 1051, 1059 (9th Cir.
2014). Based on the facts as found by the Tax Court and
reviewed under the applicable standard, I find it clear that the
sale to Berlinetta did not have “any economic substance other
than the creation of tax benefits.” Id. (internal quotation mark
omitted).
In Owens v. Comm’r, 568 F.2d 1233 (6th Cir. 1977), the
Sixth Circuit considered a similar sale of a corporation whose
only asset was cash and noted that “[w]hen one purports to
sell cash in corporate solution the burden is surely
particularly severe on the seller to show that the only purpose
served is not tax avoidance.” Id. at 1239. The court
explained that “[t]he reason for such a heavy burden when the
corporation owns just cash is that the corporation has already
been effectively liquidated from a corporate law viewpoint,
20 SLONE V. CIR
and such a liquidation is a step in the process of winding up
a corporation’s affairs.” Id.
The Sixth Circuit examined whether the sale of stock was
in fact the sale of the “equity of a business,” distinguishing
between sale of a going concern and sale of corporate assets.
Id. (“When a stockholder sells his stock, he is selling his
proprietary interest in a going concern and not an interest in
the corporate assets.”). The court concluded that because the
corporation had no ongoing business activity, the corporation
“was a lifeless shell at the time of the purported sale of
stock.” Id. (“A corporation that is not carrying on business
activity can be a ready vehicle for use as ‘nothing more than
a contrivance’ in a scheme of illegitimate tax avoidance.”
(quoting Gregory v. Helvering, 293 U.S. 465, 469 (1935))).
The Sixth Circuit also examined the financing for the
stock purchase. It noted that the purchasers, who took out a
loan to buy the stock, had two alternatives to repay the loan:
“they could have withdrawn the cash from the bank account,
thereby reducing [the corporation] to an empty corporate
shell, and pay the loan immediately,” or “they could have
earned profit with [the corporation’s] business, and paid the
loan over a period of time.” Id. at 1240. If the purchasers
had planned to operate the corporation as a going concern,
“[t]he risks of such a business would have led the Bank . . . to
require collateral, but . . . the record does not reveal that
collateral was required.” Id. In fact, the purchasers
“withdrew all the cash from the [corporation] bank account
the same day as the purported sale of stock” in order to repay
the loan. Id.
The Sixth Circuit held that because “tax liabilities cannot
be altered on the basis of parties exchanging the most
SLONE V. CIR 21
fungible commodity of all, cash,” the stock sale should not be
respected. Id.
Many of the same factors considered by the Sixth Circuit
in Owens are present in this case. Slone Broadcasting was a
corporation with no assets other than cash and a built-in gain
tax liability of about $15 million that was sold for cash.
There is no dispute in this case that Slone Broadcasting had
no business operations at the time of the sale to Berlinetta.
The financing scheme was very similar to that in Owens:
One of the conditions of the purchase loan from Rabobank
was that it be repaid using Slone Broadcasting’s cash, via an
irrevocable payment instruction, as soon as Berlinetta
acquired Slone. Just as in Owens, the purchaser of Slone
Broadcasting borrowed the purchase price, and after closing,
immediately withdrew money from the corporate bank
account in order to repay the purchase loan. While the Tax
Court found that “Berlinetta also held at least $18,459,360 of
equity at the time of closing” apart from the loan from
Rabobank, the only support in the record for this finding is a
law firm opinion letter prepared for Slone Broadcasting and
written three months after the stock sale. I would conclude
that this finding was clearly erroneous. In any event, it is
undisputed that Berlinetta did in fact borrow the purchase
price from Rabobank and immediately repaid the loan with
Slone Broadcasting’s cash.
Just as in Owens, these undisputed facts are sufficient to
draw the legal conclusion that the sale of Slone
Broadcasting’s stock was in substance a liquidating
distribution to Slone Broadcasting’s shareholders. Thus, the
Slone Broadcasting shareholders are “transferees” under
26 U.S.C. § 6901 as “the shareholder[s] of a dissolved
corporation.” See 26 C.F.R. § 301.6901-1(b). I would
22 SLONE V. CIR
remand to the Tax Court to determine whether the
shareholders are substantively liable under Arizona state law.