Shockley v. Comm'r

• Decision Date: 03 October 2017
• Docket Number: No. 16-13473.,16-13473.
• Parties: Sandra K. SHOCKLEY, et al., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

872 F.3d 1235

Sandra K. SHOCKLEY, et al., Petitioners-Appellants,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 16-13473.

United States Court of Appeals, Eleventh Circuit.

October 3, 2017

Jenny Louise Johnson Ware, Guinevere M. Moore, Johnson Moore, LLC, Chicago, IL, for Petitioner–Appellant.

Arthur Thomas Catterall, Gilbert Steven Rothenberg, Francesca Ugolini, U.S. Department of Justice Chief Appellate Section Tax Division, William J. Wilkins, Chief Counsel–IRS, Washington, DC, for Respondent–Appellee.

Before TJOFLAT and WILSON, Circuit Judges, and ROBRENO,^* District Judge.

ROBRENO, District Judge:

Terry and Sandra Shockley, a husband and wife duo, formerly owned a television and radio company called Shockley Communications Corporation ("SCC"). In conjunction with their retirement, the Shockleys sold SCC and reported their gains from this sale on timely federal income tax returns for calendar year 2001. In September 2007, the Commissioner of the Internal Revenue Service ("IRS") assessed additional tax liabilities against SCC for its tax year ending May 31, 2001, and subsequently asserted transferee liability under I.R.C. § 6901 against each of eight of the largest selling shareholders, including Terry and Sandra Shockley.

The Tax Court upheld the Commissioner's transferee liability assessment. The Shockleys, along with another former SCC shareholder, Shockley Holdings, L.P. (collectively, "Petitioners"), now appeal this ruling, arguing that the Tax Court erred in assessing tax liabilities against them as transferees under both federal and state laws. For the reasons that follow, we will affirm the decisions of the Tax Court.

I.

The facts giving rise to this appeal—some of which are stipulated, and none of which are disputed—are lengthy and complex. Drawing largely on the Tax Court's recitation in the opinion below, we organize this tortuous series of transactions into the following broad categories: the decision to sell, negotiations, structuring the transaction, the agreements, closing and results, and the tax consequences of all the foregoing.

A.Decision to Sell

After purchasing a radio station in Madison, Wisconsin, in early 1985, Terry and Sandra Shockley incorporated SCC, a closely held corporation, under the laws of Wisconsin. Between 1985 and 2000, SCC grew to own five television stations, a radio station, and a video production company in Wisconsin, as well as a television station and several radio stations in Minnesota. SCC brought in additional investors during this time to fund its significant business expansion.

SCC eventually came to be owned by 29 separate shareholders, including Petitioners, several other individuals, a number of investment funds, and the State of Wisconsin Investment Board (collectively, "SCC shareholders"). Terry and Sandra, who each separately owned 10.18879% of SCC's common stock, served as members of the SCC Board of Directors ("SCC Board"). Terry also served as SCC's president and treasurer, and Sandra served as SCC's vice president and secretary. Shockley Holdings L.P.—an entity owned by the Shockleys, as general partners, and their adult children, as limited partners—owned 3.52508% of SCC's common stock.

The Shockleys began considering their retirement options in 1999. On January 21, 2000, they met with Stephen A. Schmidt ("Schmidt"), a managing director and tax partner of a professional audit, tax, and consulting services firm called RSM McGladrey, Inc. ("RSM"). During this meeting and through later communications, the Shockleys, other members of the SCC Board, and RSM discussed the following six potential alternative futures for SCC: (1) a sale of assets by SCC followed by its liquidation; (2) a sale of SCC stock; (3) tax-free reorganizations under I.R.C. § 368 ; (4) a "spin-off" of the SCC's radio assets under I.R.C. § 355, followed by a sale of SCC stock; (5) redemption of SCC stock from the SCC shareholders; and (6) a sale of SCC stock using an employee ownership plan. Schmidt also introduced the Shockleys to Integrated Capital Associates ("ICA"), a firm that facilitated stock sales of companies.

In February 2000, the Shockleys met with media broker Kalil & Co., Inc. ("Kalil") to further discuss potential alternatives for the future of SCC. On April 5, 2000, Terry signed an agreement authorizing Kalil "to act as exclusive broker in the sale of all of [SCC's] assets." Appellee's Corrected Suppl. App. Tab 5 (Ex. 23-J). After this exclusive brokerage agreement was in place, Kalil began seeking potential buyers for SCC. Around the same time, in April 2000, the Shockleys met with Eric Sullivan, a principal of ICA, to learn more about his company's services.

Over the next several months, the Shockleys continued to seek and receive advice from RSM and communicate regularly with Kalil regarding efforts to sell SCC. RSM presented the Shockleys with analyses that compared the projected impacts on both buyers and sellers of a stock sale versus an asset sale. One such analysis, which assumed a value of $190 million for SCC's radio and television assets, showed net after-tax liquidation proceeds to SCC shareholders of $94 million for a hypothetical stock sale, but only $75 million for the correlating proceeds of a hypothetical asset sale. After reviewing this analysis, and out of concern that a piecemeal sale of SCC's assets over time might negatively impact employee retention and decrease productivity, the SCC Board initially decided to pursue a stock sale.

This decision notwithstanding, Terry subsequently discovered that the general preference of buyers in the broadcasting industry was an asset sale. Further, although Kalil was able to find potential buyers interested in SCC's assets, the Shockleys learned it was unlikely that a broadcasting business would be interested in buying the stock of a company, like SCC, that had both television stations and radio stations; buyers who were interested in small-sized-market radio stations generally were not interested in medium-sized-market television stations, and vice versa.

B.Negotiations

In May 2000, a purchase offer for SCC's television assets was made by an Illinois-based media company named Quincy Newspapers, Inc. ("QNI"). Structured as an asset sale, QNI's offer tendered a purchase price of $160 million for SCC's television stations and production company. These items comprised approximately 95% of SCC's total radio and television assets. No agreement was reached immediately, but negotiations continued throughout the summer of 2000.

Meanwhile, in a letter dated June 7, 2000, Kalil made Terry aware of two separate companies—Fortrend International, LLC ("Fortrend"), and Diversified Group ("Diversified")—that had each expressed willingness to buy the stock of SCC and then sell its assets to third-party buyers. As Kalil explained in the letter, this "buy stock/sell assets" transaction would, with either Fortrend or Diversified, proceed as follows:

It looks like they negotiate a fee of somewhere between 5-7% on the gain. You would sell them the stock and they would sell the assets to a buyer. Both applications would be filed with the [Federal Communications Commission ("FCC") ] concurrently and they would "own" [SCC] for about one hour. They feel confident that their tax attorneys can explain this in such detail as to give both buyer and seller total comfort.

Appellee's Corrected Suppl. App. Tab 7 (Ex. 27-J).

In late August 2000, Schmidt arranged a conference call for the Shockleys and several others to speak with David Kelley, who worked at ICA. The agenda for the call included an overview of ICA, the possible use of a "Midco" transaction for the stock sale of SCC,¹ and a discussion as to why ICA should be selected over Fortrend or Diversified. During this conference, the Shockleys and other attendees were informed of a risk that the IRS might recharacterize the transaction as an asset sale. ICA, however, represented that none of the similarly structured transactions it had facilitated over an 18-year period had been successfully challenged or unwound.

In September 2000, QNI indicated that it was willing to consider structuring the transaction as a purchase of SCC's stock instead of assets, and it asked Kalil to provide SCC's asking price for the stock. In response, Terry drafted a letter to QNI that (1) showed SCC's projected purchase prices for a stock sale and, alternatively, for an asset sale; (2) indicated that SCC could proceed with a transaction structured either way; (3) provided an analysis comparing an asset purchase with a stock purchase; and (4) explained that the cash savings to SCC of a stock sale, rather than an asset sale, would be $11 million. See Appellee's Corrected Suppl. App. Tab 58 (Ex. 349-J). He noted in this letter that SCC had a " 'Midco' company arrangement standing by to proceed."² See id. QNI did not agree to the terms presented in that letter and never agreed to buy the stock of SCC, but it remained interested in the television assets nonetheless. Kalil therefore continued to negotiate with QNI, on behalf of an ICA affiliate, regarding the price and terms of a potential sale of SCC's assets.

The SCC shareholders represented on the SCC Board finally decided in the fall of 2000 that they would sell SCC's stock to an affiliate of ICA.³ Terry informed Kalil that this was their intention.

C.Structuring the Transaction

On October 6, 2000, ICA organized Northern Communications Acquisition, LLC ("NCA LLC"), a Delaware limited liability company. On October 13, 2000, NCA LLC executed a trust agreement with Roger Ohlrich, an agent of ICA, forming Northern Communications Statutory Trust ("NCS Trust") under the laws of Connecticut. According to the trust instrument, for which NCA LLC acted as trustor and beneficiary and Ohlrich acted as trustee, NCS Trust was established for the sole purpose of acquiring the stock of SCC.⁴

Also on October 6, 2000, QNI faxed a nonbinding letter of intent to ICA regarding QNI's purchase of...