Slone v. Commissioner of Internal Revenue, No. 16-73349 (9th Cir. 2018)
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These consolidated appeals stemmed from the Commissioner's efforts to hold the former shareholders of a close corporation, Slone Broadcasting, responsible for taxes owed on the proceeds of its sale of assets to another broadcasting company, Citadel. The shareholders followed up the asset sale to Citadel by selling Slone Broadcasting's stock to another company, Berlinetta, an affiliate of Fortrend. Berlinetta and Slone Broadcasting then merged into a new company called Arizona Media.
The Ninth Circuit reversed the tax court's judgment on the petition for redetermination of federal income tax deficiency challenging the shareholders' liability for taxes in connection with an asset and stock sale. The panel applied Arizona's Uniform Fraudulent Transfer Act and held that the transaction was constructively fraudulent as to the creditor (the IRS) because the debtor (Slone Broadcasting) did not receive a reasonably equivalent value in exchange for the transfer to the shareholders and was left unable to satisfy its tax obligation. In this case, the purpose of the shareholders' transaction with Berlinetta was tax avoidance and thus reasonable actors in the shareholders' position would have been on notice that Berlinetta never intended to pay Slone Broadcasting's tax obligation. The panel held that the shareholders' sale to Berlinetta was a cash-for-cash exchange lacking independent economic substance beyond tax avoidance. The panel also held that the shareholders were liable to the government for Slone Broadcasting's federal tax obligation as "transferees" under 26 U.S.C. 6901, because Slone Broadcasting's liquidating distribution to the shareholders was a constructively fraudulent transfer under Arizona law.
Court Description: Tax. The panel reversed a decision of the Tax Court, and remanded with instructions to enter judgment in favor of the Commissioner of Internal Revenue, on a petition for redetermination of federal income tax deficiency challenging Petitioners’ liability for taxes in connection with an asset and stock sale. Slone Broadcasting Co. sold its assets to Citadel Broadcasting Co. and its shares to Berlinetta, Inc. The stock sale to Berlinetta involved the payment of funds obtained through a loan, plus the assumption of a tax liability generated by the asset sale. Slone Broadcasting and Berlinetta then merged into a company called Arizona Media Holdings, Inc. After paying off the loan used to buy the stock, Arizona Media had no assets with which to pay the tax liability from the asset sale. The Internal Revenue Service then sent notices of tax liability to Petitioners, the former shareholders of Slone 4 SLONE V. CIR Broadcasting, claiming that they were liable as “transferees” for taxes owed on the asset sale, under 26 U.S.C. § 6901. In an earlier appeal, this court considered the Tax Court’s original ruling in favor of Petitioners, and remanded to the Tax Court because it had not applied the correct test to determine whether Petitioners were transferees under section 6901. On remand, the Tax Court again ruled for Petitioners. In this appeal, applying Arizona’s Uniform Fraudulent Transfer Act, the panel held that the transaction was constructively fraudulent as to the creditor (the IRS) because the debtor (Slone Broadcasting) did not receive a reasonably equivalent value in exchange for the transfer to the shareholders and was left unable to satisfy its tax obligation. The panel explained that the sale to Berlinetta was a cash-for- cash exchange lacking independent economic substance beyond 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. Because the transaction lacked independent economic substance apart from tax avoidance, and because Petitioners were liable for the tax obligation under applicable state law, the panel held Petitioners liable for Slone Broadcasting’s federal tax obligation as “transferees” under 26 U.S.C. § 6901.
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