Slone Revocable Trust v. Cir
810 F.3d 599
9th Cir.2015Background
- Slone Broadcasting sold substantially all assets to Citadel for $45M, realizing a large taxable gain; the corporation did not distribute proceeds to shareholders.
- Shortly after, shareholders sold all Slone stock to Berlinetta (a Fortrend affiliate) for cash; Berlinetta assumed Slone’s tax liability and Slone later merged into Arizona Media.
- Arizona Media reported offsetting transactions and obtained a refund of an earlier tax payment; IRS later audited and assessed a $13.5M deficiency plus penalties and interest against Arizona Media.
- Arizona Media failed to pay; IRS issued transferee liability notices to the former Slone shareholders under 26 U.S.C. § 6901, arguing the stock sale was in substance a liquidation (liquidating distribution) and thus shareholders were transferees.
- Tax Court respected the stock-sale form, finding shareholders lacked knowledge of any illegitimate scheme and had no duty to investigate Fortrend/Berlinetta; it therefore rejected transferee liability. Commissioner appealed.
- Ninth Circuit held the Tax Court applied the wrong legal test: courts must look to substance (subjective business purpose and objective economic substance) under the Stern two-prong framework when deciding transferee status; remanded for proper findings on both prongs.
Issues
| Issue | Plaintiff's Argument (Commissioner) | Defendant's Argument (Shareholders) | Held |
|---|---|---|---|
| Whether shareholders are transferees under § 6901 by being shareholders of a dissolved corp (i.e., whether stock sale was actually a liquidating distribution) | The stock sale was a disguised liquidation; form should be disregarded and shareholders are transferees | The stock sale was a bona fide stock sale with economic substance; form must be respected, so shareholders are not transferees | Court: Tax Court used wrong legal standard; must apply substance-over-form/economic-substance analysis to prong one and remand for findings |
| Proper legal test to determine transferee status under § 6901 | N/A (argues form should yield to substance) | N/A (argues form controls absent proof of sham) | Court: Adopt Ninth Circuit’s substance-over-form approach (subjective business purpose + objective economic substance) for the first Stern prong and apply state law for second prong; both prongs required to impose liability |
| Whether Tax Court’s factual findings (no knowledge of scheme; independence of transactions) control outcome | Findings about lack of shareholder knowledge are irrelevant to prong one (substance analysis) | Findings support respecting form and rejecting transferee status | Court: Those findings relate to state-law prong (knowledge under state fraudulent-transfer rules) and do not substitute for required § 6901 substance analysis; remand required |
| Remedy/procedure on appeal | N/A | N/A | Vacated and remanded for Tax Court to make findings on subjective and objective factors (prong one) and then decide state-law substantive liability (prong two); costs awarded to Commissioner |
Key Cases Cited
- United States v. Phellis, 257 U.S. 156 (recognizing importance of substance over form in taxation)
- Comm’r v. Court Holding Co., 324 U.S. 331 (tax incidence depends on transaction substance)
- Frank Lyon Co. v. United States, 435 U.S. 561 (factors for disregarding transaction form; economic substance/business purpose inquiry)
- Stern v. Comm’r, 357 U.S. 39 (federal procedure vs. state law governs substantive transferee liability under § 6901)
- Salus Mundi Found. v. Comm’r, 776 F.3d 1010 (9th Cir.) (articulating two-prong Stern framework for transferee liability)
- Reddam v. Comm’r, 755 F.3d 1051 (9th Cir.) (applying holistic subjective/objective economic-substance analysis)
- Sacks v. Comm’r, 69 F.3d 982 (9th Cir.) (considering subjective and objective factors for sham transaction analysis)
- Owens v. Comm’r, 568 F.2d 1233 (6th Cir.) (sale of cash-shell corporation treated as liquidation; heavy burden to show non-tax purpose)