Slone v. Comm'r of Internal Revenue

Decision Date24 July 2018
Docket Number No. 16-73351, No. 16-73354,No. 16-73349, No. 16-73356,16-73349
Citation896 F.3d 1083
Parties Norma L. SLONE, Transferee, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. Slone Family GST Trust, UA Dated, August 6, 1998, Transferee, D. Jack Roberts, Trustee, Petitioner-Appellee, v. Commissioner of Internal Revenue, Respondent-Appellant. James C. Slone, Transferee, Petitioner-Appellee, v. Commissioner of Internal Revenue, Respondent-Appellant. Slone Revocable Trust, UA Dated September 20, 1994, Transferee, James C. Slone and Norma L. Slone, Trustees, Petitioner-Appellee, v. Commissioner of Internal Revenue, Respondent-Appellant.
CourtU.S. Court of Appeals — Ninth Circuit

Arthur T. Catterall (argued), Francesca Ugolini, and Gilbert S. Rothenberg, Attorneys; David A. Hubbert, Acting Assistant Attorney General; Tax Division, United States Department of Justice, Washington, D.C.; for Respondent-Appellant.

Stephen E. Silver (argued) and Jason M. Silver, Silver Law PLC, Scottsdale, Arizona, for Petitioners-Appellees.

Before: Mary M. Schroeder and Paul J. Watford, Circuit Judges, and William K. Sessions III,* District Judge.

SCHROEDER, Circuit Judge:

These consolidated appeals by the Commissioner of Internal Revenue from the Tax Court involve the Commissioner's efforts to hold Petitioners, the former shareholders of a close corporation, Slone Broadcasting Co. ("Slone Broadcasting"), responsible for taxes owed on the proceeds of its 2001 sale of assets to another broadcasting company, Citadel Broadcasting Co. ("Citadel"), for $45 million. This generated an estimated tax liability of $15.3 million. This is the second time the Commissioner has appealed to this Court. The background is described in more detail in our first opinion, Slone v. C.I.R. , 810 F.3d 599 (9th Cir. 2015). We only summarize here.

The Petitioners followed up the asset sale to Citadel by selling Slone Broadcasting's stock to another company, Berlinetta, Inc. ("Berlinetta"), an affiliate of Fortrend International, LLC ("Fortrend"). See id. at 602. Berlinetta assumed Slone Broadcasting's income tax liability. Id. Berlinetta, using borrowed funds, paid the Petitioners an amount representing the net value of the company after the asset sale plus a premium representing almost two-thirds of the amount of Slone Broadcasting's tax liability. The Petitioners thus received two-thirds of the amount Slone Broadcasting should have paid in taxes after the asset sale.

Berlinetta and Slone Broadcasting then merged into a new company called Arizona Media Holdings, Inc. ("Arizona Media"), id. at 603, purportedly engaged in the business of debt collection. After the newly formed entity repaid the loan Berlinetta had used to purchase Petitioners' stock, however, the new company had no assets with which to pay the taxes due from the original asset sale. So the Commissioner went after the Petitioners as the ultimate transferees of the proceeds of the original sale of assets. The Commissioner seeks to establish that the Petitioners are liable for the Slone Broadcasting tax liability that Berlinetta assumed but never paid.

In the first appeal we considered the Tax Court's original ruling in favor of the Petitioners. We remanded to the Tax Court because it had not applied the correct test to determine whether the Petitioners were "transferees" under 26 U.S.C. § 6901. See Slone , 810 F.3d at 606–08. Under that section, the Commissioner can, under certain circumstances, assess tax liability against a taxpayer who is " ‘the transferee of assets of a taxpayer who owes income tax,’ " and such liability is assessed as if the transferee were the original taxpayer. Id. at 604 (quoting Salus Mundi Found. v. Comm'r , 776 F.3d 1010, 1017 (9th Cir. 2014) ). We held that the Petitioners would be subject to transferee liability if two conditions were satisfied: first, the relevant objective and subjective factors must show that under federal law the transaction with Berlinetta lacked independent economic substance apart from tax avoidance; and second, we explained Petitioners must be liable for the tax obligation under applicable state law. See id. at 604–08. The Tax Court erred in its first decision in failing to look behind the form of this transaction to determine its economic substance under federal law. In the first appeal, we emphasized that both federal and state law issues must be satisfied to create liability. See id. at 608.

On remand to the Tax Court, the Commissioner argued that the Petitioners received, in substance, a liquidating distribution from Slone Broadcasting, and that the form of the stock sale to Berlinetta should be disregarded. Petitioners emphasized that the proceeds they received came from Berlinetta, not Slone Broadcasting. The Tax Court chose to address only state law issues. It correctly looked to the Uniform Fraudulent Transfer Act ("UFTA") that Arizona has adopted, but the Tax Court concluded it could disregard the form of the stock sale to Berlinetta and look to the entire transactional scheme only if Petitioners knew that the scheme was intended to avoid taxes. The Tax Court concluded Petitioners had no such knowledge and ruled once again for the Petitioners.

On appeal the Commissioner argues that the Tax Court misinterpreted the Arizona statute to require actual or constructive knowledge, but that even if the statute requires such a showing, the Commissioner satisfied its burden. We do not reach the issue of statutory interpretation because the record contains ample evidence that Petitioners were at the very least on constructive notice that the entire scheme had no purpose other than tax avoidance.

This record, as described in our earlier opinion and in the Tax Court's opinion below, shows that the purpose of Petitioners' transaction with Berlinetta was tax avoidance, and that reasonable actors in Petitioners' position would have been on notice that Berlinetta never intended to pay Slone Broadcasting's tax obligation. It is not disputed that Slone Broadcasting, following its asset sale to Citadel, was not engaged in any business activities. It held only the cash proceeds of the sale and receivables, plus the accompanying $15 million tax liability. When Petitioners sold the stock to Berlinetta, along with that tax liability, Petitioners received, in substance, an ostensibly tax-free liquidating distribution from Slone Broadcasting. There was no legitimate economic purpose other than to avoid paying the taxes that would normally accompany a liquidating asset sale and distribution to shareholders. See Diebold Found., Inc. v. Comm'r , 736 F.3d 172, 175 (2d Cir. 2013).

The financing transactions further demonstrate that the deal was only about tax avoidance. Berlinetta borrowed the funds to make the purchase. After the merger with Slone Broadcasting into Arizona Media, that entity, had it been intended to be a legitimate business enterprise, could have repaid the loan over time and retained sufficient capital to sustain its purported debt collection enterprise and cover the tax obligation. Instead, the financing was structured so that, after the merger, Slone Broadcasting's significant cash holdings went immediately out the door to repay the loan Berlinetta used to finance its purchase of the Slone Broadcasting stock and tax liability. In the first appeal, Judge Noonan observed that this case bears a striking resemblance to Owens v. Commissioner , 568 F.2d 1233 (6th Cir. 1977), in which a similar cash-for-cash purchase was held to be a liquidating distribution to the shareholder. See Slone , 810 F.3d at 608–09 (Noonan, J., concurring in part and dissenting in part). The analogy is apt.

While the majority of the panel in the first appeal declined to reach the issue of economic substance under federal law, it is appropriate to do so now. The Petitioners' sale to Berlinetta was a cash-for-cash exchange lacking independent economic substance beyond tax avoidance. See Feldman v. C.I.R. , 779 F.3d 448, 455–57 (7th Cir. 2015). Indeed Petitioners' own advisors expressed surprise over this transaction; one of Petitioners' lawyers testified that in his nearly twenty years of private practice he "had never seen a transaction like this."

We therefore turn to whether, under Arizona law, the Petitioners are liable to the government for Slone Broadcasting/Arizona Media's tax liability. See Slone , 810 F.3d at 604–05. As the Tax Court recognized, this question must be resolved under Arizona's Uniform Fraudulent Transfer Act. The Commissioner argues in this appeal that Petitioners are liable under that statute's constructive fraud provisions. See ...

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  • Young v. Hawaii
    • United States
    • U.S. Court of Appeals — Ninth Circuit
    • July 24, 2018
    ... ... need for that might arise beyond as well as within the home." (internal quotations and citations omitted)); Moore , 702 F.3d at 941 ("[T]he ... ...
  • Marshall v. PricewaterhouseCoopers, LLP
    • United States
    • Oregon Court of Appeals
    • December 29, 2021
    ...imputed the knowledge of advisors to their clients in assessing whether those clients had constructive knowledge. See Slone v. C.I.R. , 896 F.3d 1083, 1087 (9th Cir. 2018), cert.den. , ––– U.S. ––––, 139 S. Ct. 1348, 203 L.Ed.2d 571 (2019) ; Hawk v. C.I.R. , 114 T.C.M. (CCH) 501, 2017 WL 51......
  • Tricarichi v. Comm'r of Internal Revenue, 16-73418
    • United States
    • U.S. Court of Appeals — Ninth Circuit
    • November 13, 2018
    ...v. Comm’r , 810 F.3d 599, 604–05 (9th Cir.2015) ( Slone I ) (setting forth two-pronged Stern test); see also Slone v. Comm’r , 896 F.3d 1083, 1086 (9th Cir.2018) ( Slone II ) (applying Stern test). Here, we affirm the tax court’s conclusion that Tricarichi is also liable for the pre-notice ......
  • Marshall v. Comm'r
    • United States
    • U.S. Court of Appeals — Ninth Circuit
    • July 23, 2019
    ...its general purpose to make uniform the law with respect to the subject of [OUFTA] among states enacting it"); Slone v. Comm'r, 896 F.3d 1083, 1085-88 (9th Cir. 2018) (Slone II) (holding that a similar stock sale could be collapsed under the comparable Arizona UFTA if the former shareholder......
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1 books & journal articles
  • Recent Developments Affecting Insolvency and Commercial Finance in California and the Ninth Circuit
    • United States
    • California Lawyers Association Business Law Section Annual Review (CLA) No. 2019, 2019
    • Invalid date
    ...following the leveraged acquisition of their stock as part of a tax avoidance scheme. [Slone v. Commissioner of Internal Revenue, 896 F.3d 1083 (9th Cir. 2018).]Comment: In retrospect, is there anything the selling shareholders could have done to protect themselves from this foreseeable ris......

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