Frank Sawyer Trust of May 1992, Transferee v. Comm'r of Internal Revenue

• Citation: 712 F.3d 597
• Decision Date: 29 March 2013
• Docket Number: No. 12–1586.,12–1586.
• Parties: FRANK SAWYER TRUST OF MAY 1992, Transferee; Carol S. Parks, Trustee, Petitioner, Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (1st Circuit)

712 F.3d 597

FRANK SAWYER TRUST OF MAY 1992, Transferee; Carol S. Parks, Trustee, Petitioner, Appellee,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellant.

No. 12–1586.

United States Court of Appeals,First Circuit.

March 29, 2013.

Francesca U. Tamami, Tax Division, Department of Justice, with whom Gilbert S. Rothenberg, Kenneth L. Greene, Tax Division, Department of Justice, Kathryn Keneally, Assistant Attorney General, and Tamara W. Ashford, Deputy Assistant Attorney General, were on brief for appellant.

David R. Andelman with whom Juliette Galicia Pico and Lourie & Cutler, P.C. were on brief for appellee.

Before LYNCH, Chief Judge, BOUDIN^* and STAHL, Circuit Judges.

LYNCH, Chief Judge.

This case involves the Internal Revenue Service's efforts to collect taxes and penalties assessed upon four corporations. The corporations acknowledged that they owed the federal government more than $24 million in taxes and penalties, but before the Internal Revenue Service (IRS) could collect against the corporations, the corporations rendered themselves insolvent by transferring all of their assets to other entities.

The issue in dispute is whether the previous owner of the four corporations, the Frank Sawyer Trust of May 1992, is liable to the IRS for the corporations' unpaid taxes and penalties. The Trust sold the corporations before the taxes came due and before the asset-stripping occurred. Following well-established Supreme Court precedent, the Tax Court looked to state substantive law—here, the Massachusetts Uniform Fraudulent Transfer Act—to determine the Trust's liability. The court concluded that the Trust could not be held liable for the corporations' taxes and penalties because the IRS failed to prove that the Trust had knowledge of the new shareholders' asset-stripping scheme and because the IRS did not show that any of the corporations' assets were transferred directly to the Trust.

The Commissioner of Internal Revenue now seeks review of the Tax Court's decision. The Commissioner claims that the Tax Court should have applied the federal substance-over-form doctrine to determine, as a threshold matter, whether the Trust should be considered a “transferee” of the four corporations' assets. The Commissioner also argues that the Tax Court clearly erred in finding that the Trust lacked constructive knowledge of the new shareholders' scheme.

We conclude that the Tax Court correctly looked to Massachusetts law to determine whether the Trust could be held liable for the corporations' taxes and penalties, and we reject the Commissioner's argument that the Tax Court was obligated to consider the federal substance-over-form doctrine as a threshold matter. We also decline to disturb the Tax Court's factual finding that the Trust lacked knowledge—actual or constructive—of the new shareholders' tax avoidance intentions.

However, we part ways with the Tax Court insofar as the Tax Court construed Massachusetts fraudulent transfer law to require, as a prerequisite for the Trust's liability, either (1) that the Trust knew of the new shareholders' scheme or (2) that the corporations transferred assets directly to the Trust. The IRS has presented evidence of fraudulent transfers from the four companies to various acquisition vehicles, and the acquisition vehicles purchased the four companies from the Trust. If the Tax Court finds that at the time of the purchases, the assets of these acquisition vehicles were unreasonably small in light of their liabilities and that the acquisition vehicles did not receive reasonably equivalent value in exchange for the purchase prices, then the Trust could be held liable for taxes and penalties assessed upon the four corporations regardless of whether it had any knowledge of the new shareholders' asset-stripping scheme. We recognize that these issues have not been clearly raised and fully briefed by the parties, but there is no waiver and we can move beyond the parties' arguments. We leave it to the Tax Court to determine, on remand, whether the conditions for liability are met in this case.

I. Background

Upon Frank Sawyer's death in 1992, a marital deduction trust was established for the benefit of his widow, Mildred Sawyer. See generally Rabkin & Johnson, Federal Income, Gift & Estate Taxation § 52.20 (Matthew Bender & Co. 2012) (overview of marital deduction trusts). The Trust owned a portfolio of stocks in closely-held corporations, and Frank and Mildred Sawyer's daughter, Carol Parks, served as the chief executive officer and president of the companies owned by the Trust from 1992 onwards. At the time of Mildred Sawyer's death in March 2000, her taxable estate, which included Trust assets, was determined to be in excess of $138 million, and her death triggered federal estate and Massachusetts inheritance tax liabilities exceeding $76 million, due in December 2000. See26 U.S.C. § 6075(a) (2000) (estate tax returns due nine months after death).

Parks, who became the sole trustee and non-charitable beneficiary of the Trust upon her mother's death, decided to liquidate two Trust-owned companies—Town Taxi Inc. and Checker Taxi Inc.—in order to generate cash to meet the estate's large tax liabilities. Town Taxi and Checker Taxi both held valuable taxi medallions which conferred the right to operate a cab service in the City of Boston and to pick up passengers at Logan Airport. By August 2000, the two taxi companies had sold or entered into agreements to sell all their medallions and other assets. The sales triggered large corporate income tax liabilities for both Town Taxi and Checker Taxi.

Shortly before Mildred Sawyer's death, the Trust's longtime attorney, Walter McLaughlin, had received a promotional letter from a company called MidCoast Credit Corp., which advertised itself as being in the business of buying corporations that were in the process of selling all their assets and that would face large tax liabilities related to their liquidations. After Mildred Sawyer died, McLaughlin contacted MidCoast to inquire about sale possibilities. A MidCoast representative said that the company did not have the financial resources to purchase Town Taxi and Checker Taxi at that time, but the representative referred McLaughlin to another firm, Fortrend International, LLC, which conducted similar transactions.

Fortrend, which represented itself as an investment bank with offices in four U.S. cities as well as Melbourne, Australia, offered to purchase the stock of the taxi companies from the Trust once the companies had liquidated all of their assets and satisfied all of their non-tax liabilities. Fortrend offered to pay a price equal to the value of the companies' assets (which by that point consisted only of cash) minus 50% of the value of the companies' tax liabilities. Thus, in the case of Town Taxi, which held about $18.6 million in cash and faced federal and state tax liabilities of approximately $7.5 million, Fortrend would pay the Trust roughly $14.85 million (i.e., $18.6 million minus 50% of $7.5 million). In the case of Checker Taxi, which held about $21 million in cash and faced federal and state tax liabilities of approximately $6.8 million, Fortrend would pay the Trust roughly $17.6 million. These purchase prices represented significant premiums above the amount that the Trust would receive if the companies paid their federal and state tax bills themselves and then distributed the remainder to the Trust (which would result in the Trust receiving roughly $11.1 million from Town Taxi and approximately $14.2 million from Checker Taxi).

Before consummating the transaction with Fortrend, Town Taxi and Checker Taxi deposited their cash in accounts at the Dutch financial institution Rabobank. Meanwhile, Town Taxi and Checker Taxi changed their names to TDGH, Inc., and CDGH, Inc., respectively, so that the Trust could retain the taxi companies' names after the sale. (The Trust would later sell the Town Taxi name to a third party and retain the Checker Taxi name itself.) Also prior to the transaction, Fortrend formed a new Delaware limited liabilitycompany, Three Wood LLC, which borrowed $30 million from Rabobank. On October 11, 2000, Three Wood wired more than $32.4 million to the Trust's account (the combined purchase price for the two companies, plus a small amount of interest); the Trust delivered the stock of TDGH and CDGH to Three Wood, and Three Wood transferred the stock to two shell corporations that it had set up. Three Wood then transferred the cash in the two companies' accounts to its own account at Rabobank. Three Wood repaid the $30 million Rabobank loan on October 12 and, over the next eleven weeks, moved most of the remaining cash into accounts held by other Fortrend entities. By the end of 2000, all but $93,602 had been stripped from TDGH, which faced federal and state tax liabilities of $7.5 million; and all but $308,639 had been removed from CDGH, which faced federal and state tax liabilities of $6.8 million. The record reveals no evidence that Carol Parks or the Trust's representatives knew anything about Fortrend's post-sale activities.

The following year, the Trust decided to liquidate the assets of two more of its portfolio companies and sell those companies—which by that point would hold only cash—to Fortrend. One of the two, St. Botolph Holding Company, was in the process of selling three properties in Boston to Northeastern University; the other company, Sixty–Five Bedford Street, Inc., was negotiating the sale of a property in Boston's Beacon Hill neighborhood to Suffolk University. St. Botolph would face tax liabilities of more than $8.5 million on its gains from the sale to Northeastern, and Sixty–Five Bedford would face a corporate income tax liability of slightly more than $2 million on its gains from the sale to Suffolk as well as its disposition of its remaining properties.

Again, Fortrend used controlled subsidiaries to consummate the...