Slone v. Comm'r of Internal Revenue

• Citation: 810 F.3d 599
• Decision Date: 08 June 2015
• Docket Number: Nos. 12–72464,12–72495,12–72497.,12–72496,s. 12–72464
• Parties: James C. SLONE; Norma L. Slone; Slone Revocable Trust; UA Dated September 20, 1994; Transferee, Petitioners–Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellant. Norma L. Slone, Petitioner–Appellee, v. Commissioner of Internal Revenue, Respondent–Appellant. Slone Family GST Trust, Petitioner–Appellee, v. Commissioner of Internal Revenue, Respondent–Appellant. James C. Slone, Petitioner–Appellee, v. Commissioner of Internal Revenue, Respondent–Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

810 F.3d 599

James C. SLONE; Norma L. Slone; Slone Revocable Trust; UA Dated September 20, 1994; Transferee, Petitioners–Appellees,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellant.

Norma L. Slone, Petitioner–Appellee,

v.Commissioner of Internal Revenue, Respondent–Appellant.

Slone Family GST Trust, Petitioner–Appellee,

v.Commissioner of Internal Revenue, Respondent–Appellant.

James C. Slone, Petitioner–Appellee,

v.Commissioner of Internal Revenue, Respondent–Appellant.

Nos. 12–72464

12–72495

12–72496

12–72497.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 21, 2014.

Filed June 8, 2015.

Amended Aug. 28, 2015.

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.

Before: JOHN T. NOONAN and SANDRA S. IKUTA, Circuit Judges and WILLIAM H. ALBRITTON, III,^* Senior District Judge.

Opinion by Judge IKUTA

; Partial Concurrence and Partial Dissent by Judge NOONAN.

IKUTA, Circuit Judge:

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, 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

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, 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. 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.

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 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.

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...