Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-12-72497/USCOURTS-ca9-12-72497-1/pdf.json

Parties Involved:
Commissioner of Internal Revenue
Appellant
James C. Slone
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JAMES C. SLONE; NORMA L. SLONE;

SLONE REVOCABLE TRUST; UA

DATED SEPTEMBER 20, 1994;

TRANSFEREE,

Petitioners-Appellees,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellant.

No. 12-72464

Tax Ct. No.

6632-10

NORMA L. SLONE,

Petitioner-Appellee,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellant.

No. 12-72495

Tax Ct. No.

6629-10

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2 SLONE V. CIR

SLONE FAMILY GST TRUST,

Petitioner-Appellee,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellant.

No. 12-72496

Tax Ct. No.

6630-10

JAMES C. SLONE,

Petitioner-Appellee,

v.

COMMISSIONER OF INTERNAL

REVENUE,

Respondent-Appellant.

No. 12-72497

Tax Ct. No.

6631-10

ORDER AND

AMENDED

OPINION

Appeal from a Decision of the

United States Tax Court

Argued and Submitted

November 21, 2014—San Francisco, California

Filed June 8, 2015

Amended August 28, 2015

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SLONE V. CIR 3

Before: John T. Noonan and Sandra S. Ikuta, Circuit

Judges and William H. Albritton, III,

*

 Senior District

Judge.

Order;

Opinion by Judge Ikuta;

Partial Concurrence and Partial Dissent by Judge Noonan

SUMMARY**

Tax

The panel vacated and remanded a decision by the Tax

Court on a petition for redetermination of federal income tax

deficiency involving an asset and stock sale.

Slone Broadcasting Co. sold its assets to Citadel

Broadcasting Co. Slone’s shareholders then sold their shares

to Berlinetta, Inc., which changed its name to Arizona Media

and was later administratively dissolved for failure to file an

annual report. The Internal Revenue Service sent notices of

tax liability to the former shareholders of Slone Broadcasting,

claiming that they were liable as “transferees” for taxes owed

on Slone Broadcasting’s asset sale, under 26 U.S.C. § 6901,

and that the IRS could disregard the form of the stock sale

* The Honorable William H. Albritton III, Senior District Judge for the

U.S. District Court for the Middle District of Alabama, sitting by

designation.

** This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

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4 SLONE V. CIR

because the substance of the transaction was that Slone

Broadcasting dissolved upon selling its assets, then

distributed those assets to its shareholders through the stock

sale. The Tax Court determined that the stock sale was a

legitimate transaction whose form must be respected.

The panel held that the Tax Court applied an incorrect test

in making this determination. The panel explained that, when

the Commissioner of Internal Revenue claims a taxpayer was

“the shareholder of a dissolved corporation” for purposes of

§ 6901, but the taxpayer did not receive a liquidating

distribution if the form of the transaction is respected, a court

must consider the relevant subjective and objective factors to

determine whether the formal transaction “had any practical

economic effects other than the creation of income tax

losses.” The panel remanded for the Tax Court to apply the

proper legal standard under Comm’r v. Stern, 357 U.S. 39

(1958).

Judge Noonan concurred in part and dissented in part. He

concluded that the record is sufficient to reach the merits of

the first prong of the Stern test, and would hold that the stock

sale transaction had no economic substance and that the

shareholders are transferees under § 6901. He would remand

only on the question of state law substantive liability (the

second prong of Stern).

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SLONE V. CIR 5

COUNSEL

Arthur T. Catterall (argued) and Francesca Ugolini (argued),

Assistant United States Attorneys; Kathryn Keneally,

Assistant Attorney General; Tamara W. Ashford, Deputy

Assistant Attorney General; Gilbert S. Rothenberg and

Kenneth L. Greene, Attorneys, Tax Division, United States

Department of Justice, Washington, D.C., for RespondentAppellant.

Stephen E. Silver (argued), Jason M. Silver, and David R.

Jojola, Silver Law PLC, Scottsdale, Arizona, for PetitionersAppellees.

ORDER

The opinion filed June 8, 2015, and appearing at 788 F.3d

1049, is hereby amended as follows:

On page 1053, the second sentence of the penultimate

paragraph and the final paragraph should be deleted and

replaced with the following:

The test for this second prong depends on the

law of the state where the transfer occurred. 

See, e.g., id. (“Under the [New York Uniform

Fraudulent Conveyance Act], a party seeking

to recharacterize a transaction must show that

the transferee had ‘actual or constructive

knowledge of the entire scheme that renders

[its] exchange with the debtor fraudulent.’”)

(alterations in original) (quoting Diebold

Found., Inc. v. Comm’r, 736 F.3d 172,

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6 SLONE V. CIR

184–85 (2d Cir. 2013)). The two Stern test

prongs “are separate and independent

inquiries.” Salus Mundi, 776 F.3d at 1012.

With this amendment, the petition for rehearing, filed July

16, 2015, is DENIED. No further petitions for rehearing or

rehearing en banc will be entertained.

OPINION

IKUTA, Circuit Judge:

This appeal involves two sales. First, Slone Broadcasting

Co. sold essentially all of its assets to Citadel Broadcasting

Co. for $45 million. The shareholders of Slone Broadcasting

then sold all their shares to Berlinetta, Inc. for $33 million. 

The substance of the stock sale, according to the

Commissioner of the Internal Revenue Service (IRS), is that

the shareholders received a liquidating distribution from the

corporation. The Commissioner contends that the form of

this transaction should be disregarded for federal tax law

purposes. The shareholders, in turn, claim that the transaction

was a legitimate stock sale transaction and its form must be

respected. The tax court agreed with the shareholders. On

appeal, we conclude that the tax court applied an incorrect

test in holding that it would respect the form of the stock sale.

I

Slone Broadcasting Co., a radio broadcasting business,

had two shareholders: the Slone Revocable Trust, for which

James C. Slone and his wife Norma L. Slone were trustees,

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SLONE V. CIR 7

and the Slone Family GST Trust, for which John Barkleywas

the sole trustee. On December 21, 2000, Slone Broadcasting

entered into an asset purchase agreement with Citadel

Broadcasting Co., in which Citadel agreed to pay $45 million

for all assets of the radio stations owned and operated by

Slone Broadcasting. The transaction closed in July 2001. 

Because Slone Broadcasting’s basis in these assets was $6.4

million, Slone Broadcasting realized a capital gain of

approximately $38.6 million and incurred an estimated

federal and state income tax liability of $15.3 million. The

corporation did not make any distributions to the

shareholders. In October 2001, Slone Broadcasting made its

first federal income tax payment of $3.1 million to the IRS

for the tax year ended June 30, 2002.

Before the transaction with Citadel closed, Fortrend

International, LLC expressed an interest in a merger deal with

Slone Broadcasting. Fortrend proposed purchasing all of

Slone Broadcasting’s shares for $29.8 million, and then

restructuring the company to engage in the asset recovery

business. Slone Broadcasting’s shareholders investigated

whether Fortrend and its offer were legitimate. A tax

attorney hired by the shareholders confirmed that Fortrend’s

business plan projections were reasonable, and he consulted

with an industry expert to confirm that Fortrend and its thirdparty service provider were reputable and were represented

by well-regarded accounting and law firms. When the

shareholders asked for information regarding the methods it

would use to reduce the shareholders’ tax liability, Fortrend

would not respond, claiming its methods were proprietary. 

Nevertheless, Fortrend assured Slone Broadcasting that the

transaction would not be a “listed transaction” pursuant to

IRS Notice 2001-51, 2001-2 C.B. 190, which specifies tax

avoidance transactions that must be disclosed or registered. 

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8 SLONE V. CIR

On December 10, 2001, the Slone Broadcasting shareholders

agreed to sell all the shares of Slone Broadcasting to

Berlinetta, Inc., a Fortrend affiliate, for $35.8 million. 

Berlinetta agreed to assume Slone Broadcasting’s income tax

liability. The shareholders, Slone Revocable Trust and the

Slone Family GST Trust, received cash payments of $31

million and $2.6 million, respectively, from the sale.

After closing, Slone Broadcastingmerged with Berlinetta. 

The new company changed its name to Arizona Media

Holdings, Inc. On December 13, 2001, a shareholder of

Arizona Media contributed Treasury bills with a basis of

$38.1 million to the new company. Arizona Media then sold

the bills for $108,731. Arizona Media filed its tax return for

the tax year ended June 30, 2002, reporting a $37.9 million

gain from the asset sale and an offsetting loss of $38 million

from the Treasury bill sale. Arizona Media claimed it had no

income tax liability, and requested a refund for the $3.1

million tax payment made by Slone Broadcasting. The IRS

granted this refund.

The IRS began investigating Arizona Media in March

2005. The IRS assessed a tax deficiency for taxes due on

Slone Broadcasting’s December 2000 sale of assets to Citadel

in the amount of $13.5 million in 2008, along with a penalty

of $2.7 million and interest of $7.3 million.1 Arizona Media

failed to pay any of the assessed tax, penalty, or interest. In

August 2009, the state of Arizona administratively dissolved

Arizona Media for failure to file an annual report.

1 Arizona Media had agreed to extend the limitations period in which the

IRS could assess tax liability through May 2008.

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SLONE V. CIR 9

After failing to collect the tax deficiency from Arizona

Media, the IRS sent notices of liability to the former

shareholders of Slone Broadcasting. The notices claimed that

the shareholders were liable for the taxes owed on Slone

Broadcasting’s sale of assets to Citadel because the

shareholders were “transferees” of Slone Broadcasting for

purposes of 26 U.S.C. § 6901. (Section 6901 authorizes the

IRS to require a transferee of assets to pay the unpaid taxes

owed by the transferor under certain circumstances.) The IRS

took the position that it could disregard the form of the

shareholders’ sale of Slone Broadcasting stock to Berlinetta. 

Instead, according to the IRS, the substance of the transaction

was that Slone Broadcasting dissolved upon selling its assets

to Citadel, and then distributed those assets to its shareholders

through the Fortrend transaction.

The shareholders filed petitions for review of this

determination in tax court, arguing that the form of the stock

sale transaction to Berlinetta should be respected, and

therefore the shareholders were not “transferees” of Slone

Broadcasting’s assets under § 6901.

The tax court agreed, holding that “[w]e will respect the

form of the transactions in this case.” It first found that the

asset sale between Slone Broadcasting and Citadel was

genuinely independent from the stock sale between Slone

Broadcasting and Berlinetta, and that there was no evidence

that the Slone Broadcasting shareholders conducted the asset

sale as the first step in a tax scheme to offset the potential

capital gains from the sale. Second, the court found that the

Slone Broadcasting shareholders neither knew, nor should

have known, that Fortrend and Berlinetta were involved in an

illegitimate tax evasion scheme. The court noted that when

the shareholders asked for more information about Fortrend’s

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10 SLONE V. CIR

methods for offsetting gains from the asset sale, they were

told that the methods were proprietary. The court concluded

that the shareholders had no duty to conduct further

investigation, and no responsibility for any tax strategies

adopted by Berlinetta after the transaction closed.

Based on these findings and conclusions, the tax court

held that neither the substance over form doctrine, nor any

related doctrine, required the tax court to “recast the stock

sale as a liquidating distribution.”2 The tax court concluded

that the form of the stock sale between the shareholders and

Berlinetta should be respected, and therefore rejected the

IRS’s theory that the shareholders were liable for taxes,

interest, and penalties arising from Slone Broadcasting’s sale

of its assets. The Commissioner timely appealed.

II

We have jurisdiction over this appeal under I.R.C.

§ 7482(a)(1). We review a tax court’s factual determinations

for clear error and its application of legal standards de novo. 

See Sacks v. Comm’r, 69 F.3d 982, 986 (9th Cir. 1995). 

Because a tax court must apply the correct legal standards

when it characterizes a transaction for tax purposes, see id.,

we reject the shareholders’ argument that such a

characterization raises only questions of fact.

2 The tax court held that the Commissioner had waived an alternative

argument that the stock sale should be disregarded for tax purposes under

the economic substance doctrine, but did not explain the difference

between this doctrine and the “substance over form” doctrine which it

considered. As explained below, any subtle differences between these

doctrines is not relevant for our analysis here.

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SLONE V. CIR 11

A

The question before us is whether the Slone Broadcasting

shareholders can be held liable for taxes on Slone

Broadcasting’s sale of assets to Citadel because the

shareholders were “transferees” of the proceeds of that sale.

Under 26 U.S.C. § 6901, the Commissioner can assess tax

liability against a taxpayer who is “the transferee of assets of

a taxpayer who owes income tax.” Salus Mundi Found. v.

Comm’r, 776 F.3d 1010, 1017 (9th Cir. 2014). Tax liabilities

on transferred assets shall, with certain exceptions, be

“assessed, paid, and collected in the same manner and subject

to the same provisions and limitations as in the cases of taxes

with respect to which the liabilities were incurred.” 

26 U.S.C. § 6901.

While federal law provides the procedure for collecting

tax liabilities from a transferee, state law answers the

question whether the alleged transferee is substantively liable

for the tax. Comm’r v. Stern, 357 U.S. 39, 44–45 (1958). 

Therefore, in order to impose tax liability on a transferee, a

court must engage in a two-pronged inquiry, see Salus Mundi,

776 F.3d at 1018 (citing Stern, 357 U.S. at 42, 44–45), which

is sometimes called the Stern test. The first prong asks: “is

the party a ‘transferee’ under § 6901 and federal tax law?” 

Id. Under federal law, a “transferee” is defined as including

a “donee, heir, legatee, devisee, [or] distributee.” 26 U.S.C.

§ 6901(h). Treasury regulations further define the term

“transferee” to include “the shareholder of a dissolved

corporation.” 26 C.F.R. § 301.6901-1(b).

The second prong of the Stern test asks: “is the party

substantively liable for the transferor’s unpaid taxes under

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12 SLONE V. CIR

state law?” Salus Mundi, 776 F.3d at 1018. The test for this

second prong depends on the law of the state where the

transfer occurred. See, e.g., id. (“Under the [New York

Uniform Fraudulent Conveyance Act], a party seeking to

recharacterize a transaction must show that the transferee had

‘actual or constructive knowledge of the entire scheme that

renders [its] exchange with the debtor fraudulent.’”)

(alterations in original) (quoting Diebold Found., Inc. v.

Comm’r, 736 F.3d 172, 184–85 (2d Cir. 2013)). The two

Stern test prongs “are separate and independent inquiries.” 

Salus Mundi, 776 F.3d at 1012.

B

The Commissioner argues that the tax court erred in

analyzing the first prong of the Stern test: whether the

shareholders are “transferees” as “shareholder[s] of a

dissolved corporation.” 26 C.F.R. § 301.6901-1(b). The

parties do not dispute that if the form of the stock sale

transaction between the shareholders and Berlinetta is

respected, the shareholders did not receive a liquidating

distribution from a dissolved corporation, and therefore were

not transferees of Slone Broadcasting’s assets (or liable for

Slone Broadcasting’s taxes). Therefore, the crucial question

is whether the tax court erred in respecting the form of the

shareholders’ stock sale to Berlinetta for federal tax purposes

under the first prong of the Stern test, leaving it unnecessary

for the tax court to analyze the shareholders’ substantive

liability under state law under the second prong of the Stern

test.

Although we have not previously considered how a court

should analyze a transaction for purposes of transferee

liability under § 6901, both the Supreme Court cases, and our

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SLONE V. CIR 13

own precedent, require us to look through the form of a

transaction to consider its substance. The Supreme Court has

long recognized “the importance of regarding matters of

substance and disregarding forms,” United States v. Phellis,

257 U.S. 156, 168 (1921), because “[t]he incidence of

taxation depends upon the substance of a transaction,”

Comm’r v. Court Holding Co., 324 U.S. 331, 334 (1945). In

explaining the factors that should guide a court’s analysis

regarding when it is appropriate to disregard the form of a

transaction, the Supreme Court framed the inquiry as whether

“there is a genuine multiple-party transaction with economic

substance which is compelled or encouraged by business or

regulatory realities, is imbued with tax-independent

considerations, and is not shaped solely by tax-avoidance

features that have meaningless labels attached.” Frank Lyon

Co. v. United States, 435 U.S. 561, 583–84 (1978).

We have interpreted Frank Lyon as requiring courts to

consider both subjective and objective factors in

characterizing a transaction for tax purposes. See Casebeer

v. Comm’r, 909 F.2d 1360, 1362–63 (9th Cir. 1990). We

have used different terminology from time to time, but

consistently apply the same approach. In Casebeer, we

applied “a two-part test for determining whether a transaction

is a sham: 1) has the taxpayer shown that it had a business

purpose for engaging in the transaction other than tax

avoidance? 2) has the taxpayer shown that the transaction had

economic substance beyond the creation of tax benefits?” Id.

at 1363 (citing Bail Bonds by Marvin Nelson, Inc. v. Comm’r,

820 F.2d 1543, 1549 (9th Cir. 1987)); see also Sacks, 69 F.3d

at 987–88 (considering subjective and objective factors in

analyzing whether a transaction was a sham). Similarly, in

Reddam v. Commissioner, we applied the “economic

substance doctrine,” which likewise focused on two prongs:

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14 SLONE V. CIR

“the subjective aspect of whether the taxpayer intended to do

anything other than acquire tax deductions, and the objective

aspect of whether the transaction had anyeconomic substance

other than creation of tax benefits.” 755 F.3d 1051, 1059 (9th

Cir. 2014) (quoting Sacks, 69 F.3d at 987). Finally in Stewart

v. Commissioner, we referred to the “substance-over-form

doctrine” as part of a well-established body of common law

that included consideration of a transaction’s “business

purpose” and “economic reality.” 714 F.2d 977, 987–88 (9th

Cir. 1983).

In determining whether to disregard the form of a

transaction, we do not conduct a “rigid two-step analysis”

applying the subjective and objective factors, but rather focus

“holistically on whether the transaction had any practical

economic effects other than the creation of income tax

losses.” Reddam, 755 F.3d at 1060 (internal quotation marks

and emphasis omitted); see also Sacks, 69 F.3d at 987–92

(looking at a transaction as a whole to determine whether it

was a sham). If a common sense review of the transaction

leads to the conclusion that a particular transaction does not

have a non-tax business purpose or “any economic substance

other than creation of tax benefits,” Reddam, 755 F.3d at

1059 (internal quotation mark omitted), the form of that

transaction may be disregarded, and the Commissioner may

rely on its underlying economic substance for tax purposes.

This approach to characterizing a transaction for tax

purposes, considering both subjective and objective factors,

is also used by other circuits, although they too describe in it

varying ways. See, e.g., Feldman v. Comm’r, 779 F.3d 448,

454 (7th Cir. 2015) (noting that the “animating principle” of

each of “several related, overlapping doctrines used in tax

cases,” including “the ‘substance over form’ doctrine, the

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SLONE V. CIR 15

‘business purpose’ doctrine, [and] the ‘economic substance’

doctrine,” is that “the law looks beyond the form of a

transaction to discern its substance”). As Feldman noted,

“[t]he distinctions between these doctrines are subtle, if they

exist at all.” Id. at 454 n.6; see also Bittker and Lokken,

Federal Taxation of Income, Estates and Gifts ¶ 4.3.4A (3d

ed. Supp. 2014) (noting that the substance over form doctrine,

the business purpose doctrine, the economic substance

doctrine, and the sham transaction doctrine have tended to

coalesce in the case law).

3 Congress has codified a similar

approach considering subjective and objective factors.4

We conclude that this approach is applicable for

determining whether a taxpayer is a transferee for purposes

of § 6901. Accordingly, when the Commissioner claims a

taxpayer was “the shareholder of a dissolved corporation” for

purposes of 26 C.F.R. § 301.6901-1(b), but the taxpayer did

not receive a liquidating distribution if the form of the

transaction is respected, a court must consider the relevant

subjective and objective factors to determine whether the

formal transaction “had any practical economic effects other

 

3 But see Altria Grp., Inc. v. United States, 658 F.3d 276, 291 (2d Cir.

2011) (stating, without explanation, that “[t]he substance over form

doctrine and the economic substance doctrine are independent bases to

deny a claimed tax deduction”).

4

In 2010, Congress revised 26 U.S.C. § 7701 to clarify that a transaction

has economic substance when: (1) the transaction meaningfully changes

the taxpayer’s economic position and (2) the taxpayer has a substantial

purpose for entering into the transaction. Health Care and Education

Reconciliation Act of 2010, Pub. L. No. 111-152, § 1409(a), 124 Stat.

1029 (2010). This provision applies only to transactions entered into after

March 30, 2010, id. § 1409(e), and is therefore inapplicable to the Slone

Broadcasting transaction.

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16 SLONE V. CIR

than the creation of income tax losses.” Reddam, 755 F.3d at

1060 (internal quotation mark omitted).

C

We now apply these principles to the question whether

the tax court erred in holding that the Commissioner could

not impose the tax liability of Slone Broadcasting/Arizona

Media on the Slone Broadcasting shareholders. According to

the Commissioner, the tax court should have found that the

“objective economic realities” establish that the stock sale

between the shareholders and Berlinetta was in substance a

liquidating transaction. Further, the Commissioner asserts

that the tax court should have found that Slone Broadcasting

was a “shell with nothing but cash and significant tax

liabilities” when the shareholders sold the stock, because it

had no ongoing business activities, no contractual obligations,

and no debts aside from its tax liability. The Commissioner

concludes that the stock sale was effectively a liquidation of

the company, terminating its business operations and leaving

the shareholders with cash.

Not surprisingly, the Slone Broadcasting shareholders

disagree. They claim that after its asset sale to Citadel, Slone

Broadcasting retained the human capital and resources to

acquire another radio station, and therefore was not a “lifeless

shell” at the time of its stock sale to Berlinetta. The

shareholders also argue that they had no improper tax

avoidance purposes for entering into the sale. Further, the

shareholders assert that the stock sale had economic

substance because Fortrend/Berlinetta actively engaged in

debt recovery after the sale.

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SLONE V. CIR 17

We cannot resolve this dispute because the tax court

failed to apply the correct legal standard for characterizing

the stock sale transaction for the purposes of federal

transferee liability. The court did not address either the

subjective or objective factors we apply in characterizing a

transaction for tax purposes, as it failed to make any finding

on whether the shareholders had a business purpose for

entering into the stock purchase transaction other than tax

avoidance, or whether the stock purchase transaction had

economic substance other than shielding the Slone

Broadcasting shareholders from tax liability. Instead, the tax

court focused its factual inquiry and analysis on factors that

might be relevant to the second prong of the Stern test for

assessing transferee liability, whether a party is substantively

liable for the transferor’s unpaid taxes as a matter of state

law. For instance, the tax court’s findings that the

shareholders had not orchestrated the asset sale and the stock

sale as a single scheme for tax evasion purposes, that

Fortrend and its third-party service provider were legitimate

players in the debt collection industry, and that the

shareholders had no reason to believe that Fortrend was using

illegitimate tax evasion methods and had no duty to inquire

further all relate to the question whether the shareholders

lacked actual or constructive knowledge of the entire tax

evasion scheme that rendered their transaction with Fortrend

fraudulent under state law. See Salus Mundi, 776 F.3d at

1020. But the tax court did not use these factual findings to

analyze the shareholders’ liability under the applicable state

law; it instead concluded, based on these findings, that the

form of the stock sale should be respected for the

shareholders’ transferee status under the first prong of the

Stern test. This was an error.

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18 SLONE V. CIR

Because the tax court applied the wrong legal standard to

the question of transferee liability, it failed to make findings

relating to the relevant factors for determining whether the

Commissioner could properly disregard the form of the

transaction. The tax court should make these determinations

in the first instance. See Lewis v. Comm’r, 560 F.2d 973, 978

(9th Cir. 1977) (reversing and remanding when the tax court

did not make proper factual findings). On remand, the tax

court should make the findings necessary to apply the Stern

test correctly. Under the first prong of this test, the tax court

should apply the relevant subjective and objective factors to

determine whether the Commissioner erred in disregarding

the form of the transaction in order to impose tax liability on

the shareholders as “transferees” under § 6901. Under the

second prong of the Stern test, the tax court should analyze

whether the shareholders are liable under state law for Slone

Broadcasting/Arizona Media’s unpaid tax liability. See Salus

Mundi, 776 F.3d at 1018, 1020. The tax court may begin its

analysis with either prong. The Commissioner may hold the

shareholders liable as “transferees” under § 6901 only if both

prongs of the Stern test are satisfied. See id.

5

VACATED AND REMANDED.

NOONAN, Circuit Judge, concurring in part and dissenting

in part:

I concur in parts I-IIB of the opinion. I write separately

because I conclude that the record is sufficient to reach the

 

5

 Costs are awarded to the Commissioner.

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SLONE V. CIR 19

merits of the federal law inquiry under 26 U.S.C. § 6901. I

would hold that the transaction between Slone Broadcasting

and Berlinetta had no economic substance and that the Slone

Broadcasting shareholders are transferees under 26 U.S.C.

§ 6901. Therefore, I would remand to the Tax Court only on

the question of state law substantive liability.

The Supreme Court has stated that “[t]he general

characterization of a transaction for tax purposes is a question

of law subject to review,” even though “[t]he particular facts

from which the characterization is to be made are not so

subject.” Frank Lyon Co. v. United States, 435 U.S. 561, 581

n.16 (1978). As the opinion correctlyarticulates, the standard

in this circuit is that “[t]he Tax Court’s factual determinations

about a transaction’s economic substance are reviewed for

clear error, but the legal standards it applies and the

application of those standards to the facts are reviewed de

novo.” Reddam v. Comm’r, 755 F.3d 1051, 1059 (9th Cir.

2014). Based on the facts as found by the Tax Court and

reviewed under the applicable standard, I find it clear that the

sale to Berlinetta did not have “any economic substance other

than the creation of tax benefits.” Id. (internal quotation mark

omitted).

In Owens v. Comm’r, 568 F.2d 1233 (6th Cir. 1977), the

Sixth Circuit considered a similar sale of a corporation whose

only asset was cash and noted that “[w]hen one purports to

sell cash in corporate solution the burden is surely

particularly severe on the seller to show that the only purpose

served is not tax avoidance.” Id. at 1239. The court

explained that “[t]he reason for such a heavy burden when the

corporation owns just cash is that the corporation has already

been effectively liquidated from a corporate law viewpoint,

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20 SLONE V. CIR

and such a liquidation is a step in the process of winding up

a corporation’s affairs.” Id.

The Sixth Circuit examined whether the sale of stock was

in fact the sale of the “equity of a business,” distinguishing

between sale of a going concern and sale of corporate assets. 

Id. (“When a stockholder sells his stock, he is selling his

proprietary interest in a going concern and not an interest in

the corporate assets.”). The court concluded that because the

corporation had no ongoing business activity, the corporation

“was a lifeless shell at the time of the purported sale of

stock.” Id. (“A corporation that is not carrying on business

activity can be a ready vehicle for use as ‘nothing more than

a contrivance’ in a scheme of illegitimate tax avoidance.”

(quoting Gregory v. Helvering, 293 U.S. 465, 469 (1935))).

The Sixth Circuit also examined the financing for the

stock purchase. It noted that the purchasers, who took out a

loan to buy the stock, had two alternatives to repay the loan: 

“they could have withdrawn the cash from the bank account,

thereby reducing [the corporation] to an empty corporate

shell, and pay the loan immediately,” or “they could have

earned profit with [the corporation’s] business, and paid the

loan over a period of time.” Id. at 1240. If the purchasers

had planned to operate the corporation as a going concern,

“[t]he risks of such a business would have led the Bank . . . to

require collateral, but . . . the record does not reveal that

collateral was required.” Id. In fact, the purchasers

“withdrew all the cash from the [corporation] bank account

the same day as the purported sale of stock” in order to repay

the loan. Id.

The Sixth Circuit held that because “tax liabilities cannot

be altered on the basis of parties exchanging the most

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SLONE V. CIR 21

fungible commodity of all, cash,” the stock sale should not be

respected. Id.

Many of the same factors considered by the Sixth Circuit

in Owens are present in this case. Slone Broadcasting was a

corporation with no assets other than cash and a built-in gain

tax liability of about $15 million that was sold for cash. 

There is no dispute in this case that Slone Broadcasting had

no business operations at the time of the sale to Berlinetta. 

The financing scheme was very similar to that in Owens: 

One of the conditions of the purchase loan from Rabobank

was that it be repaid using Slone Broadcasting’s cash, via an

irrevocable payment instruction, as soon as Berlinetta

acquired Slone. Just as in Owens, the purchaser of Slone

Broadcasting borrowed the purchase price, and after closing,

immediately withdrew money from the corporate bank

account in order to repay the purchase loan. While the Tax

Court found that “Berlinetta also held at least $18,459,360 of

equity at the time of closing” apart from the loan from

Rabobank, the only support in the record for this finding is a

law firm opinion letter prepared for Slone Broadcasting and

written three months after the stock sale. I would conclude

that this finding was clearly erroneous. In any event, it is

undisputed that Berlinetta did in fact borrow the purchase

price from Rabobank and immediately repaid the loan with

Slone Broadcasting’s cash.

Just as in Owens, these undisputed facts are sufficient to

draw the legal conclusion that the sale of Slone

Broadcasting’s stock was in substance a liquidating

distribution to Slone Broadcasting’s shareholders. Thus, the

Slone Broadcasting shareholders are “transferees” under

26 U.S.C. § 6901 as “the shareholder[s] of a dissolved

corporation.” See 26 C.F.R. § 301.6901-1(b). I would

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22 SLONE V. CIR

remand to the Tax Court to determine whether the

shareholders are substantively liable under Arizona state law.

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