Diebold Foundation, Inc. v. Commissioner of Internal Revenue
736 F.3d 172
2d Cir.2013Background
- Double D Ranch, Inc. (a C corporation) held highly appreciated assets; sale of those assets would trigger substantial corporate tax on built-in gain (~$81M). Shareholders were the Dorothy R. Diebold Marital Trust and Diebold New York.
- Shareholders pursued a Midco (intermediary) stock-sale/asset-sale structure: they sold Double D stock to Shap II (a newly formed Midco), which immediately sold Double D’s assets (securities to Morgan Stanley; real property to Toplands Farm). Shap II claimed tax attributes to offset gain and retained a fee.
- The IRS later determined the transactions were in substance an asset sale followed by a liquidating distribution by Double D and assessed a large deficiency against Double D; Double D had no assets to satisfy the tax.
- The Commissioner issued transferee-liability notices under 26 U.S.C. § 6901 against Diebold New York (as alleged transferee of Double D) and, subsequently, against Diebold (the successor foundation) as a transferee of a transferee. The Tax Court ruled for the foundations, finding no state-law liability under the New York Uniform Fraudulent Conveyance Act (NYUFCA).
- On appeal, the Second Circuit (1) clarified the standard of review for Tax Court mixed questions (de novo for legal standard errors; clear error for factual findings), (2) held the two § 6901 requirements (federal transferee status and state-law liability) are independent, and (3) concluded under NYUFCA the transactions should be collapsed because the shareholders had constructive knowledge — remanding to determine transferee status and applicable statute of limitations.
Issues
| Issue | Commissioner’s Argument | Diebold’s Argument | Held |
|---|---|---|---|
| Standard of review for mixed questions from Tax Court | Tax Court mixed questions should be reviewed for clear error (existing 2d Cir. precedent) | Tax Court decisions should be reviewed like bench-trial district-court decisions: de novo for legal standard, clear error for factual findings | Adopted uniform approach: de novo to extent error is misunderstanding of legal standard; clear error for factual determinations |
| Relationship between § 6901’s two prongs (transferee status vs. liability) | Federal law may recharacterize the transaction under prong one and that recharacterization should control the state-law liability analysis | The prongs are independent: transferee status is federal/procedural; liability is substantive and governed by state law | Prongs are independent; state-law liability cannot be determined by collapsing under federal tax recharacterization alone |
| Whether NYUFCA liability exists (collapse doctrine / constructive knowledge) | Tax Court found Shareholders lacked constructive/actual knowledge; thus no collapse and no conveyance under NYUFCA | Shareholders argued no constructive knowledge; transaction respected as stock sale, making NYUFCA inapplicable | Court held Shareholders had constructive knowledge (including inquiry/active avoidance); collapse appropriate; NYUFCA liability exists against Diebold New York |
| Next steps: whether foundations are liable and applicable limitations period | IRS urges further collection against successor foundations as transferees of transferee; three-year transferee-of-transferee limitations may apply | Foundations argued no transferee-of-transferee liability since no state-law conveyance by Double D to Diebold New York | Case remanded to Tax Court to determine (1) whether Diebold New York is a transferee under § 6901 (federal), (2) whether Diebold is a transferee of a transferee, and (3) which statute of limitations applies (3-year § 6901(c)(2) vs. 6-year § 6501(e)(1)(A) or other) |
Key Cases Cited
- Comm’r v. Stern, 357 U.S. 39 (Sup. Ct.) (§ 6901 is procedural; substantive liability governed by state law)
- HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995) (collapse/collapse doctrine; requirement of transferee actual or constructive knowledge)
- Rowen v. Comm’r, 215 F.2d 641 (2d Cir.) (distinguishing transferee status and liability; federal law for transferee status)
- Bausch & Lomb Inc. v. Comm’r, 933 F.2d 1084 (2d Cir.) (prior Second Circuit precedent on Tax Court mixed-question review)
- Frank Sawyer Trust of May 1992 v. Comm’r, 712 F.3d 597 (1st Cir. 2013) (holds § 6901 prongs are independent)
- Starnes v. Comm’r, 680 F.3d 417 (4th Cir. 2012) (holds § 6901 prongs are independent)