Norma Slone v. Cir
896 F.3d 1083
9th Cir.2018Background
- Slone Broadcasting sold assets to Citadel for $45 million in 2001, producing an estimated $15.3 million federal tax liability.
- Shareholders (Petitioners) then sold Slone Broadcasting stock to Berlinetta, which expressly assumed Slone’s tax liability; Berlinetta paid shareholders most of the cash that otherwise would have funded Slone’s taxes.
- Berlinetta financed the purchase with a loan; after merging Berlinetta and Slone into Arizona Media, funds were used to repay that loan, leaving no assets to satisfy Slone’s tax obligation.
- The IRS (Commissioner) sought to impose transferee liability on the former shareholders under 26 U.S.C. § 6901 for Slone’s unpaid tax.
- On remand from this Court’s prior decision, the Tax Court considered only state-law (Arizona UFTA) issues and found Petitioners lacked actual or constructive knowledge of a tax-avoidance scheme; the Commissioner appealed.
Issues
| Issue | Commissioner’s Argument | Petitioners’ Argument | Held |
|---|---|---|---|
| Whether the stock sale to Berlinetta should be disregarded under federal economic-substance principles | The sale was a cash‑for‑cash, tax‑avoidance transaction lacking independent economic substance and should be treated as a liquidating distribution | The shareholders received payment from Berlinetta, not Slone, so no taxable distribution from Slone occurred | Court: Transaction lacked economic substance and was, in substance, a liquidating distribution from Slone |
| Whether Petitioners are transferees liable under 26 U.S.C. § 6901 | If the transfer was in substance a liquidating distribution that left the debtor unable to pay taxes, shareholders are transferees and liable | Petitioners contend no transferee liability because formal payment came from Berlinetta and they lacked requisite knowledge | Court: Petitioners are transferees and liable under § 6901 because the scheme was a constructively fraudulent liquidating distribution |
| Whether Arizona’s UFTA requires actual or constructive knowledge to look to transaction substance | Commissioner: UFTA’s constructive‑fraud provisions apply without requiring proof of actual knowledge because reasonable actors would be on notice | Petitioners: Tax Court erred in ignoring form absent proof of actual or constructive knowledge | Court: Did not rest ruling on statutory interpretation; record shows constructive notice and satisfies UFTA’s constructive‑fraud standards |
| Whether the transfer was constructively fraudulent under Arizona law (UFTA) | The transfer left Slone insolvent and Slone received no reasonably equivalent value, so the transfer is constructively fraudulent as to IRS | Petitioners argue no transfer from debtor occurred and thus UFTA not implicated | Court: Transfer was constructively fraudulent under Ariz. Rev. Stat. §§ 44‑1004(A)(2), 44‑1005; shareholders liable to IRS |
Key Cases Cited
- Slone v. C.I.R., 810 F.3d 599 (9th Cir. 2015) (prior appeal addressing proper transferee‑liability test and remand)
- Diebold Found., Inc. v. Comm’r, 736 F.3d 172 (2d Cir. 2013) (transaction without legitimate non‑tax business purpose can be disregarded as a taxable distribution)
- Feldman v. C.I.R., 779 F.3d 448 (7th Cir. 2015) (cash‑for‑cash purchase lacking independent economic substance treated as distribution)
- Owens v. Commissioner, 568 F.2d 1233 (6th Cir. 1977) (similar cash‑for‑cash purchase characterized as liquidating distribution)
- Salus Mundi Found. v. Comm’r, 776 F.3d 1010 (9th Cir. 2014) (explaining transferee liability framework under § 6901)
- Hullett v. Cousin, 63 P.3d 1029 (Ariz. 2003) (interpreting Arizona UFTA insolvency and creditor protection principles)