Shockley v. Comm'r

• Decision Date: 22 June 2015
• Docket Number: Docket No. 28207-08.,Docket No. 28210-08.,T.C. Memo. 2015-113,Docket No. 28208-08.
• Parties: SANDRA K. SHOCKLEY, TRANSFEREE, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

SANDRA K. SHOCKLEY, TRANSFEREE, ET AL.,¹ Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent^*

T.C. Memo. 2015-113
Docket No. 28207-08.
Docket No. 28208-08.
Docket No. 28210-08.

UNITED STATES TAX COURT

June 22, 2015

Jenny L. Johnson, Aharon S. Kaye, Guinevere M. Moore, Ziemowit T. Smulkowski, and Alexander S. Vesselinovitch, for petitioners.

Lyle B. Press, Steven N. Balahtsis, and Gail Campbell, for respondent.

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SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION

COHEN, Judge: These cases are before us on remand from the U.S. Court of Appeals for the Eleventh Circuit in Shockley v. Commissioner, 686 F.3d 1228 (11th Cir. 2012) (Shockley II), rev'g and remanding T.C. Memo. 2011-96 (Shockley I). The Court of Appeals in Shockley II reversed our decisions entered in accordance with Shockley I, in which we decided the period of limitations issue in favor of petitioners. Accordingly, these cases were remanded to this Court for further proceedings on the issues that were not reached in Shockley I.

Subsequent to the remand, the Court of Appeals for the Seventh Circuit in Feldman v. Commissioner, 779 F.3d 448 (7th Cir. 2015), aff'g T.C. Memo. 2011-297, interpreted Wisconsin law that we apply in these cases. Although these cases are appealable to the Court of Appeals for the Eleventh Circuit because petitioners resided in Florida or had their principal place of business in Florida when the petitions were filed, we deferred this opinion to consider the interpretation of Wisconsin law in Feldman, as well as cases involving transferee liability and "Midco" transactions decided since these cases were submitted.

In three separate notices of deficiency dated August 21, 2008, respondent determined that Terry K. Shockley (petitioner), Sandra K. Shockley (Sandra

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Shockley), and Shockley Holdings Ltd. Partnership (Shockley Holdings) (collectively, petitioners) are liable as transferees for the Federal income tax liability, additions to tax, and an accuracy-related penalty of Shockley Communications Corp. (SCC) for its short tax year ended May 31, 2001. Respondent determined the value of the assets transferred to petitioners and the amounts of transferee liability of petitioners in proportion to SCC's outstanding liabilities, including interest as provided by law. Consequently, petitioners' transferee liabilities in dispute are as follows: (1) $10,975,059.03 for petitioner; (2) $11,244,084.42 for Sandra Shockley; and (3) $4,053,709.13 for Shockley Holdings.

The issues for decision on remand are whether petitioners are liable as transferees for their respective portions of the unpaid determined and assessed deficiency, additions to tax, penalty, and interest with respect to SCC's corporate income tax for its short tax year ended May 31, 2001; whether SCC is liable for the determined and assessed deficiency in tax, additions to tax, penalty, and interest for its short tax year ended May 31, 2001; and whether the Internal Revenue Service (IRS) adequately pursued collection efforts against SCC.

The parties have agreed that these cases may be decided on remand on the evidence submitted at the original trial. Unless otherwise indicated, all section

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references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Facts with respect to these cases, some of which were stipulated, were found in Shockley I and are incorporated in our findings by this reference. We summarize for convenience relevant facts from Shockley I and set forth additional findings for purposes of deciding the issues on remand. Petitioner and Sandra Shockley (collectively, Shockleys) resided in Florida at the time they filed their petitions. Shockley Holdings is a limited partnership formed in 1998 under the laws of the State of Wisconsin, and its principal place of business was Florida at the time it filed its petition.

Petitioner received a master's degree in radio, television, and film from the University of Kansas. In the mid-1960s, petitioner started his career as the news and sports director of a small radio station. He later worked for a television station--first in sales, then in management, and finally as the president of the station. In 1985, petitioner left that position and formed SCC by purchasing a radio station in Madison, Wisconsin. Petitioner incorporated SCC, a closely held corporation, in March 1985 under the laws of the State of Wisconsin.

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Sandra Shockley, who holds a bachelor's degree, taught school for 11 years before joining her husband to start SCC in 1985. She was initially a salesperson for SCC and later became the local sales manager and then the national sales manager. In 1995 she was promoted to the head of the radio division.

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. During this time, SCC brought in additional investors to fund the business expansion. By May 31, 2001, SCC was owned by 29 shareholders including petitioners, other individuals, a number of investment funds, and the State of Wisconsin Investment Board (collectively, SCC shareholders).

Petitioner owned 10.18879% of SCC's common stock and served as president and treasurer of SCC and a member of the SCC board of directors (SCC board). Sandra Shockley owned 10.18879% of SCC's common stock and served as vice president and secretary of SCC and a director on the SCC board. Shockley Holdings owned 3.52508% of SCC's common stock. Shockley Holdings is owned by the Shockleys, who are general partners, and their adult children, who are limited partners.

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In 1999 the Shockleys, approaching retirement age, started to consider their future as owners of SCC. Around early 2000 they began exploring several strategic alternatives for SCC, including selling it. On January 21, 2000, the Shockleys met with Stephen A. Schmidt, a managing director and tax partner of RSM McGladrey, Inc. (RSM). RSM, an affiliate of SCC's accounting firm McGladrey & Pullen, is a professional services firm that offers accounting, tax, and other services to middle-market companies and provided SCC and its shareholders with tax and structuring advice.

During their meeting and through later communications, the Shockleys, other members of the SCC board, and RSM discussed 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 section 368; (4) a "spin-off" of the SCC's radio station assets (radio assets) under section 355 followed by a sale of SCC stock; (5) redemption of SCC stock from the shareholders, and (6) a sale of SCC stock using an employee ownership plan. RSM presented analyses, based upon certain assumptions, comparing the impact on a buyer who purchases stock or purchases assets, as well as a seller who sells stock or sells assets. One stock sale analysis by RSM, which assumed a value of $190 million for the radio and television assets, showed net after-tax liquidation proceeds to shareholders of $94

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million for a stock sale compared with the correlating asset sale proceeds of $75 million.

In February 2000, the Shockleys met with a media broker, Kalil & Co., Inc. (Kalil), also to discuss alternatives for SCC. They had engaged Kalil before, in 1996, to sell one of their radio stations. On April 5, 2000, petitioner signed an exclusive brokerage agreement with Kalil. After the brokerage agreement was in place, Kalil began seeking potential buyers for SCC.

During their communications, Schmidt introduced the Shockleys to Integrated Capital Associates (ICA), a firm that facilitated stock sales of companies. In April 2000, petitioners met Eric Sullivan, a principal of ICA, to learn about his company's services.

Over the next several months, the Shockleys continued to seek and receive advice from RSM and communicated regularly with Kalil regarding efforts to sell SCC. As to RSM, the SCC board reviewed the analysis that Schmidt prepared comparing a stock sale with an asset sale, which projected the stock sale producing a much greater return of net after-tax proceeds to shareholders. For that reason, the SCC board decided to pursue a stock sale. At some point, however, petitioner realized that the general preference of buyers in the broadcasting industry was an asset sale.

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While Kalil was able to find potential buyers interested in SCC's assets, the Shockleys discovered that 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. Such a sale was unlikely because buyers showing interest in the small-market radio stations were not interested in the medium-sized-market television stations, and vice versa. One potential buyer, Quincy Newspapers, Inc. (QNI), a media company in Quincy, Illinois, made an offer in May 2000. Structured as an asset sale, the offer tendered a purchase price of $160 million for SCC's television stations and production company (television assets), which made up approximately 95% of SCC's total radio and television assets.

In a letter dated June 7, 2000, Kalil made petitioner aware of two companies...