Salus Mundi Found. v. Comm'r, No. 12–72527.

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Writing for the CourtNOONAN, Circuit Judge
Citation776 F.3d 1010
Docket NumberNo. 12–72527.
Decision Date22 December 2014
PartiesSALUS MUNDI FOUNDATION, Transferee, Petitioner–Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellant.

776 F.3d 1010

SALUS MUNDI FOUNDATION, Transferee, Petitioner–Appellee
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellant.

No. 12–72527.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Nov. 21, 2014.
Filed Dec. 22, 2014.


776 F.3d 1012

Arthur T. Catterall (argued), Kenneth L. Greene, and Gilbert S. Rothenberg, Attorneys, Tax Division, Department of Justice, Washington, D.C., for Respondent–Appellant.

A. Duane Webber (argued), Phillip J. Taylor, Summer M. Austin, and Mireille R. Zuckerman, Baker & McKenzie, LLP, Washington, D.C.; Jaclyn Pampel, Baker & McKenzie, Chicago, Illinois, for Petitioner–Appellee.

Appeal from a Decision of the United States Tax Court. Tax Ct. No. 24741–08.

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

OPINION

NOONAN, Circuit Judge:

OVERVIEW

The IRS appeals the United States Tax Court's decision that the Salus Mundi Foundation was not liable under 26 U.S.C. § 6901 for the unpaid tax liability arising from the sale of appreciated assets held by Double–D Ranch, Inc.

We conclude that the two requirements of 26 U.S.C. § 6901 —transferee status under federal law and substantive liability under state law—are separate and independent inquiries. Therefore, the IRS cannot rely on federal law to recharacterize the series of transactions for purposes of the state law inquiry.

The Second Circuit addressed the same factual and legal issues in Diebold Foundation, Inc. v. Comm'r, 736 F.3d 172 (2d Cir.2013). We adopt the reasoning of that opinion on the state law inquiry and conclude that the Double–D shareholders had constructive knowledge of the fraudulent tax avoidance scheme at issue. Accordingly, we collapse the series of transactions and conclude that the shareholders made a fraudulent conveyance under the New York Uniform Fraudulent Conveyance Act and that the state law liability prong of 26 U.S.C. § 6901 was therefore satisfied.

We remand to the Tax Court to determine in the first instance: (1) Salus Mundi's status as a transferee of a transferee under the federal law inquiry of 26 U.S.C. § 6901 ; and (2) whether the IRS assessed liability within the applicable limitations period.

FACTUAL AND PROCEDURAL HISTORY

A. Background on the Diebold Family and Double–D Ranch, Inc.

Richard Diebold was a major shareholder of American Home Products Corporation (AHP), a publicly traded corporation. In 1980, he formed Double–D Ranch, Inc. as a personal holding company for investment assets, including shares of AHP, other marketable securities, and real estate. Richard Diebold was married to Dorothy Diebold, and they had three children.

When Richard Diebold died in 1996, ownership of all the stock of Double–D was transferred to the Dorothy R. Diebold Marital Trust. The marital trust had three cotrustees: Dorothy Diebold; the Bessemer Trust Co.; and Andrew Bisset, Dorothy Diebold's personal attorney. Austin Power, Jr. was a senior vice president

776 F.3d 1013

at Bessemer Trust who served as counsel and primary account manager for the marital trust.

In 1999 Dorothy Diebold was 94 years old and “anxious” to make cash gifts to her children. Power explained to her that the marital trust was insufficiently liquid to make such gifts, but she would be able to make cash gifts if she were to sell the shares of Double–D. After this explanation, “she was anxious for [Bessemer] to proceed with the sale of the Double D Ranch,” and the other trustees agreed.

As part of the decision to sell Double–D, the marital trust transferred one-third of the Double–D shares to the Diebold Foundation, a charitable foundation incorporated by Richard Diebold in 1963 in New York. In 1999 its directors were Dorothy Diebold, Bisset, and Dorothy Diebold's three adult children. Each of the three adult children intended to organize their own foundations, one of which became the Salus Mundi Foundation. The directors of the Diebold Foundation planned to sell the shares of Double–D and distribute the money to the children's foundations.

Power was given primary responsibility by the Double–D shareholders to sell the shares of Double–D.

B. Double–D's Built–In Gain Tax Liability and the Use of Intermediary Transactions

In 1999, Double–D's assets were valued at approximately $319 million, including approximately $129 million of AHP stock, $162 million of other marketable securities, and $6 million of real estate in a Connecticut farm; the adjusted tax bases of these assets were nominal or low. If Double–D simply sold its assets, it would be taxed on the built-in gain of those assets, i.e. the difference between the selling price of the assets and their adjusted tax bases. See 26 U.S.C. §§ 1(h), 1001, 1221, 1222. Sale of Double–D's assets would have triggered tax liability of approximately $81 million.

Another option was to sell shares of Double–D. In that case, Double–D would continue to own the appreciated assets, and the built-in gain tax would not be triggered. See Diebold Found., Inc. v. Comm'r, 736 F.3d 172, 175–76 (2d Cir.2013) (discussing generally the issue of appreciated assets and the use of intermediary transactions to avoid tax liability). But with a stock sale, the assets would retain their low tax bases, and the built-in gain tax liability would be triggered if Double–D's new owners ever sold the assets. Id. For this reason, a potential buyer of Double–D's shares would demand a substantially lower price to account for the built-in gain tax liability. Id.

An intermediary transaction tax shelter, also known as a Midco transaction, is a financial arrangement designed to allow a seller to have the benefits of a stock sale and the buyer to have the benefits of an asset purchase with both seller and buyer avoiding the built-in gain tax liability.Id. The shareholders sell their shares in a corporation to an intermediary entity at a purchase price that does not discount for the built-in gain tax liability; the intermediary then sells the assets of the corporation to the buyer, who gets a purchase price basis in the assets. Id. The intermediary keeps the difference between the asset sale price and the stock purchase price as its fee. Id.

The intermediary attempts to avoid the built-in gain tax liability by claiming tax attributes, such as losses, that if legitimate would allow the intermediary to absorb the liability. Id.; see also I.R.S. Notice 2001–16, 2001–1 C.B. 730 ; I.R.S. Notice 2008–111, 2008–51 I.R.B. 1299. If the intermediary's tax attributes turn out to be artificial, then the built-in gain tax liability of the sold assets remains outstanding. Diebold,

776 F.3d 1014

736 F.3d at 176. The IRS may seek to collect from the intermediary, but the intermediary is often a newly formed entity without other assets and is thus likely to be judgement-proof. Id. The IRS may then seek payment from the other parties to the transaction. Id.

C. Double–D's Meetings with Potential Purchasers

Power recognized Double–D's built-in gain tax liability as a “problem” and reached out to “a whole network of people, for months” to try to find a solution that maximized the purchase price for Double–D. Power consulted Richard Leder, Bessemer's “principal outside tax counsel.” Leder testified that “it was generally known to—in that profession that there were ... some people, who for whatever reason, whatever their tax activities are, were able to make very favorable offers to sellers with stock with appreciated assets ... with the corporation having appreciated assets.” Leder directed Power to one of these “people,” Harry Zelnick of River Run Financial Advisors, LLC, as a potential purchaser for Double–D. Another managing director at Bessemer referred Power to Fortrend International LLC.

On May 26, 1999, Power, Leder, and other representatives of the Double–D shareholders met and discussed the potential sale of Double–D with Zelnick and Ari Bergman, a principal at Sentinel Advisors LLC, “a small investment banking firm that specialized in structuring economic transactions to solve specific corporate and estate or accounting issues.” On May 28, Bessemer received the written summaries of the strategies discussed, including an Executive Summary that discussed “efficiently liquidating the portfolio” and indicated that “Sentinel Advisors has performed comprehensive portfolio and liquidity analysis on your holdings and would like to present several different benchmark alternatives for evaluating the liquidation of a large equity portfolio.”

On June 1, Power and other Double–D representatives met with Fortrend. Fortrend representatives presented a strategy entitled “Buy Stock/Sell Assets Transaction,” described as “working with various clients who may be willing to buy the stock from the seller and then cause the target corporation to sell its net assets to the ultimate buyer. These clients have certain tax attributes that enable them to absorb the tax gain inherent in the assets.”

D. Stock Purchase Agreement between...

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  • Marshall v. PricewaterhouseCoopers, LLP, A172477
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    ...the Fortrend transaction was an "improper tax-avoidance" mechanism known as a "Midco" transaction. See Salus Mundi Foundation v. C.I.R. , 776 F.3d 1010, 1013 (9th Cir. 2014) (explaining the mechanics of a "Midco" transaction tax-avoidance scheme). Since the IRS's issuance of Notice 2001-16 ......
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28 cases
  • Hillen v. City of Many Trees, LLC (In re CVAH, Inc.), Bankruptcy Case No. 14–00888–JDP
    • United States
    • United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Idaho
    • May 2, 2017
    ...assets of a taxpayer who owes income tax.’ " Slone v. C.I.R. , 810 F.3d 599, 604 (9th Cir. 2015) (citing Salus Mundi Found. v. Comm'r , 776 F.3d 1010, 1017 (9th Cir. 2014) ). The Supreme Court has explained that this provision "neither creates nor defines a substantive liability but provide......
  • San Luis & Delta-Mendota Water Auth. v. Locke, Nos. 12–15144
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • December 22, 2014
    ...under the ESA, but it does not satisfy the agency's substantive obligation to comply with section 7). Because we hold that the BiOp is 776 F.3d 1010legally sound, we dismiss Plaintiffs' argument.VII. CONCLUSIONSBased on the foregoing, we REVERSE the components of the district court's opinio......
  • San Luis & Delta-Mendota Water Auth. v. Locke, Nos. 12–15144
    • United States
    • United States Courts of Appeals. United States Court of Appeals (9th Circuit)
    • December 22, 2014
    ...under the ESA, but it does not satisfy the agency's substantive obligation to comply with section 7). Because we hold that the BiOp is [776 F.3d 1010] legally sound, we dismiss Plaintiffs' VII. CONCLUSIONS Based on the foregoing, we REVERSE the components of the district court's opinion in ......
  • Marshall v. PricewaterhouseCoopers, LLP, A172477
    • United States
    • Court of Appeals of Oregon
    • December 29, 2021
    ...the Fortrend transaction was an "improper tax-avoidance" mechanism known as a "Midco" transaction. See Salus Mundi Foundation v. C.I.R. , 776 F.3d 1010, 1013 (9th Cir. 2014) (explaining the mechanics of a "Midco" transaction tax-avoidance scheme). Since the IRS's issuance of Notice 2001-16 ......
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