department of the treasury internal_revenue_service washington d c number release date date cc pa cbs br3 tl-n-7311-00 uil memorandum for jody tancer associate area_counsel lmsb - long island cc lm fsh li from subject charles e samuel acting chief branch collection bankruptcy summonses renamed corporation x formerly corporation x potential transferee_liability issues this chief_counsel_advice responds to your memorandum dated date in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent this writing may also contain privileged information any unauthorized disclosure of this writing may have an adverse effect on privileges such as the attorney client privilege if disclosure becomes necessary please contact this office for our views legend corporation x renamed corporation x corporation y company z individual q day year year year year date date date date date date date date date date tl-n-7311-00 date date a dollars b dollars c dollars d dollars e dollars f dollars g dollars h dollars i dollars in considering your request for advice regarding potential transferee_liability issues in this case we have separated your ultimate questions into some of the smaller component issues that we needed to consider to address your concerns our office also requested and received assistance from associate chief_counsel corporate and assistant chief_counsel administrative procedures judicial practice your memorandum referred to chief_counsel notice_2001_16 intermediary transactions tax_shelter dated date which associate chief_counsel corporate has now supplemented with chief_counsel notice_2001_23 intermediary transaction tax_shelter on date consistent with these notices and the analysis suggested in your memorandum we understand that corporate concurs with your proposed primary and alternative recasts in substance of the form of the taxpayer transactions at issue in this case most of corporate’s technical analysis is repeated in the extended discussion portion of this memorandum following our answers to the transferee_liability issues that concerned you however you may want to contact branch of corporate directly if you wish to discuss these recast matters in further detail as a potential alternative or supplement to pursuing transferee_liability against some of the parties identified in your memorandum which helped renamed corporation x formerly corporation x and its stockholders and corporation y structure the transactions we also requested advice from apjp about the feasibility of pursuing imposition of penalties under sec_6700 parts of apjp’s advice regarding sec_6700 penalties are included in our discussion of the possibility of pursuing transferee_liability with respect to the fees paid_by the transferor to those persons and entities involved in structuring the abusive tax transactions at issue in this case however you may want to contact branch of apjp directly if you wish to discuss the potential application of sec_6700 penalties to the structuring of these transactions in further detail background corporation x was incorporated on date in virginia you have not given us any information regarding the number or identity of the former shareholders of tl-n-7311-00 corporation x the fiscal_year of corporation x for federal_income_tax purposes for the periods at issue ended on day prior to the tax years of the transfer transactions at issue corporation x apparently paid federal_income_tax amounts for its fiscal years ended date and date some portion of the federal income taxes previously paid_by corporation x for its year and year tax years is at issue in the tax_court case of the transferor which your office is now handling because the transferor claimed a net_operating_loss nol for its tax_year ended date in which the first transfers at issue took place and carried back this claimed nol to these prior years for tentative refunds sometime during year corporation y learned that corporation x was for sale negotiations between corporations y and x apparently reached an impasse over price and whether the acquisition was to be a stock or asset acquisition the corporation x stockholders wanted to sell their stock and corporation y only wanted to acquire the corporation x assets we understand that these parties were then aware that corporation y’s proposed purchase_price for corporation x’s assets was substantially greater than corporation x’s adjusted tax basis in the assets to be sold which would result in significant capital_gains income to be reported by corporation x if these capital_gains were not legitimately offset by other loss transactions of corporation x in the tax_year then the result would be a significant federal_income_tax liability for corporation x at the corporate level which the corporation would be required to pay before distributing any surplus dividends above its debts to its shareholders sometime during year company z controlled by individual q apparently agreed to step in as an intermediary to facilitate the transactions that the corporation x shareholders and corporation y both wanted for tax purposes in exchange for some forms and amounts of compensation fees for company z and or other companies controlled by individual q in form company z agreed to acquire the corporation x stock from the corporation x stockholders through a special purpose entity that was wholly owned by company z the special purpose entity would obtain a short term bridge loan from a bank to finance the acquisition of the stock in form from the corporation x shareholders the special purpose entity then immediately planned to merge into corporation x and change its name but be treated the same as a successor to corporation x for tax purposes company z also agreed that shortly after but almost at the same time these events occurred new corporation x would sell substantially_all of its assets to corporation y for a prearranged price new corporation x would then pay off its bridge loan to the bank with the sale proceeds from corporation y and from a limited amount of retained corporation x assets company z individual q and or related individual q companies the company z group would then still be left with enough corporation x assets or tax_attributes to pay themselves immediate short term fees and potential longer term compensation contingent fees or dividends for facilitating the whole transaction between the corporation x shareholders and corporation y the company z tl-n-7311-00 group’s willingness to facilitate these transactions and its ability to obtain the potential longer term compensation out of retained corporation x assets or tax_attributes depended upon the company z group being able to rearrange the business of new corporation x on paper so that new loss transactions would occur in the tax_year of the corporation y asset sale to offset and exceed the significant capital_gains income to be realized by corporation x from the sale and to recover federal income taxes paid_by corporation x in prior tax years through nol_carryback procedures we understand that your pending tax_court case with the transferor concerns the validity of the paper loss transactions that the company z group devised for new corporation x in its fiscal_year ending date in order to offset and exceed the significant capital_gains income realized by corporation x from the asset sale to corporation y in this tax period if the service is successful in establishing the transferor’s tax_liability in this pending tax_court case then all potential transferees will be barred from later attempting to relitigate the existence or amounts of the transferor’s tax_liabilities for the tax periods at issue conversely if the service is not successful in establishing the transferor’s tax_liabilities in this pending tax_court case then we understand there are no other outstanding federal tax_liabilities of the transferor to serve as the basis for asserting potential transferee_liability against the persons including entities at issue who may be deemed to have received transfers from the transferor at the relevant times on or about date company z apparently entered into letters of intent with both the corporation x shareholders to acquire their corporation x stock in form conditioned upon company z’s nearly contemporaneous sale of the corporation x assets to corporation y and corporation y for the sale of the corporation x assets conditioned upon company z’s acquisition in form of the corporation x stock the sale of all the shares of corporation x stock to company z’s special purpose entity closed on date for a price of approximately a dollars company z’s special purpose entity had borrowed b dollars that day from a bank the bridge loan to finance the transaction the special purpose entity then immediately merged into corporation x this same day company z apparently set in motion new corporation x’s involvement in the loss transactions the service also contend sec_1 see 29_f3d_433 8th cir cert_denied 513_us_1190 29_f3d_1533 11th cir 105_tc_370 the corporation x shareholders before date all apparently reported and paid federal income taxes on their returns for this period on their respective portions of the approximately a dollars received in form for their corporation x stock within a month of this transaction on date new corporation x changed its name to renamed corporation x but retained its status as a virginia corporation and as the successor to corporation x for federal_income_tax purposes tl-n-7311-00 lack economic_substance and which are at issue in the transferor’s pending tax_court case the following day on date the sale of substantially_all of new corporation x’s assets to corporation y closed with a purchase_price of about c dollars cash plus the assumption of certain liabilities by corporation y new corporation x used the asset sale proceeds along with certain retained account receivables apparently valued at about d dollars to pay off the bridge loan to the bank which had been used to pay the net amounts due the corporation x shareholders on or about this date we understand that the company z group apparently had substantially completed new corporation x’s involvement in the loss transactions that are at issue in the transferor’s pending tax_court case on or about this date we also understand that the company z group paid itself fees totaling at least e dollars out of the retained new corporation x assets then under its control for inter alia facilitating the transactions between the corporation x shareholders and corporation y and for structuring the purported loss transactions of new corporation x after date new corporation x apparently engaged in no further active business functions though it took another four years until date for renamed corporation x to be formally terminated as a corporation recognized under virginia law renamed corporation x’s tax_year including the asset sale to corporation y and the purported loss transactions at issue in the transferor’s pending tax_court case closed at the end of the corporation’s ordinary fiscal_year on date approximately four months after the series of transactions described above for this tax_year renamed corporation x reported combined ordinary and capital_gain from the sale of assets to corporation y of about f dollars but also claimed deductions and losses arising from the purported loss transactions of more than double that amount resulting in a claimed nol for renamed corporation x’s tax_year ended date of approximately g dollars which the company carried back to its prior tax years the timing of renamed corporation x’s filing of its form_1120 return for its tax_year ending date and of its filing requests for tentative nol_carryback refunds for corporation x’s prior tax years ending date sec_2 and is uncertain to us however about one year after the close of corporation x’s tax_year ended date in date renamed corporation x apparently received from the service tentative refunds arising from the nol carrybacks described above which totaled about h dollars not including any interest the service believes these nol_carryback refund proceeds were then either distributed to or used for the benefit of the renamed corporation x shareholders at that time which we understand consisted largely if not entirely of members of the company z group the income_tax deficiency determined by the service against corporation x renamed corporation x for the corporation’s tax_year ended date is about tl-n-7311-00 i dollars the income_tax deficiencies determined by the service against corporation x renamed corporation x for the corporation’s tax years ended date sec_2 and are for the full amount of the nol_carryback refunds described above which is a total of less than half of the tax_deficiency determined for the alleged loss_year assuming the service’s determinations in the pending tax_court case involving the transferor’s tax_liabilities for its tax years ending date sec_2 and are sustained there is no question that the transferor was insolvent by at least date and for all time periods of its existence thereafter there is also no question at this point that it would be futile for the service to seek collection of the transferor’s tax_liabilities from the transferor because the transferor is now dissolved under state law and retains no known or valuable assets your chief questions for us are whether for transferee_liability purposes the transferor’s tax debts existed when the transfers to the corporation x shareholders were made which is closely related to the question of whether the transfers to the corporation x shareholders left corporation x insolvent and whether these related questions matter for all potential transferee_liability theories available to the service in this case you also ask us to evaluate the service’s potential transferee_liability theories in relation to the transfers apparently made to the company z group to address these ultimate matters we first considered a number of predicate issues that were fairly raised by your request for advice issues conclusions issue in the facts of this case is it appropriate for the service to apply the economic_substance_doctrine to recast the transaction so that the company z group members are treated as an intermediary that is disregarded and to treat corporation x as having sold its assets directly to corporation y and distributed the sale proceeds to the original corporation x shareholders in liquidation conclusion yes associate chief_counsel corporate concurs with the primary recast theory proposed by your office in this case with respect to the original corporation x shareholders issue alternatively may the service recast the transaction to treat corporation x as redeeming its stock from its original shareholders conclusion yes associate chief_counsel corporate also concurs with the assertion of the alternative recast theory proposed by your office in this case with respect to the original corporation x shareholders issue since sec_6901 only sets forth a non-exclusive method for the service to collect a liability of a transferee of property and the secondary sources of this transferee_liability at law or in equity must be found outside of sec_6901 what tl-n-7311-00 are the secondary sources of law that are alternatively available for the service in this case to establish the transferee_liability of the various potential transferees conclusion sections and of the virginia code annotated and the several transferee_liability provisions of sec_3304 of the federal debt collection procedure act fdcpa u s c et seq should all be considered by the service in this case issue under the several potential theories of virginia and fdcpa fraudulent transfer law the service may consider in this case for the corporation x shareholders and new corporation x’s unpaid tax_liability for its tax_year ended date is it a genuine problem that the transfers at issue to the corporation x shareholders occurred during the tax_year when the transferor’s unpaid tax debts arose but about four months before the end of corporation x’s tax_year ended date conclusion no though it is often generally stated that a necessary element of transferee_liability in equity is that the transfer was made after the debt of the transferor accrued and tax practitioners understand that federal_income_tax liabilities do not accrue until the end of a tax period pursuant to the internal revenue code’s annual_accounting_concept there is also a widely accepted gloss on this principle in the case of tax debts which accrue during the period in which the transfer occurred several of the sources of potential transferee_liability law available to the service in this case may also apply to debts that arise before at or after the transfer issue under the several potential theories of virginia and fdcpa fraudulent transfer law the service may use in this case for the corporation x shareholders and new corporation x’s unpaid tax debts arising from excessive nol_carryback refunds is it a genuine problem that the direct transfers to the corporation x shareholders occurred about sixteen months before new corporation x received the excessive nol_carryback refunds for its tax years ending date sec_2 and conclusion no some of the service’s potential fraudulent transfer theories in this regard may require further factual development and 61_tc_278 acq 1974_2_cb_1 is an adverse case you should distinguish but we believe the alexander case may properly be distinguished from your case on factual and or legal grounds issue under the several potential theories of virginia and fdcpa fraudulent transfer law the service may use in this case for the approximately e dollars of fees the company z group apparently paid itself out of new corporation x’s assets on or about date is there an appropriate means of treating the company z group as a transferee with respect to these fees under sec_6901 tl-n-7311-00 conclusion yes if the service can establish that the fees the company z group paid itself at this time were excessive ie not for reasonably equivalent value then the service may properly assert transferee_liability against the company z group with respect to the excessive portion of these fees on any of the grounds described under issue above alternatively even if the company z group fees are treated as paid_by new corporation x for reasonably equivalent value the service may treat the company z group as an insider of new corporation x which received a transfer for a debt when it had reasonable_cause to believe new corporation x was insolvent pursuant to fdcpa sec_3304 issue under the several potential theories of virginia and fdcpa fraudulent transfer law the service may use in this case for the approximately h dollars of nol_carryback refund proceeds the company z group apparently paid itself out of new corporation x’s assets in or after date is there an appropriate means of treating the company z group as a transferee with respect to these distributions under sec_6901 conclusion yes the analysis is the same as for issue except that the service does not need to rely on the retroactive treatment of tax debts incurred during the tax_year of the transfer for transferee_liability purposes discussed under issue because new corporation x was insolvent as a result of its tax debts in date by any measure of insolvency discussion sec_6901 of the internal_revenue_code provides a procedure by which the service may assess and collect unpaid taxes penalties and interest from a transferee or from a fiduciary sec_6901 is strictly a procedural statue it does not create the substantive liability of a transferee for the transferor’s tax debts the existence of or extent of a transferee’s liability is determined by applicable state or federal_law with modifications discussed below for the limitation periods applicable to debts owed the service a transferee’s liability may be established at law eg by contract or under a state or federal liability statute liability may also be established in equity which is a term we are using herein as shorthand for liability under state or federal fraudulent conveyance laws see irm from the service’s legal reference guide the service’s legal reference guide lrg generally follows the analytical distinction between transferee_liability in equity and at law that is discussed in mertens law of federal income_taxation sec_53 even though it might be argued that transferee_liability that is based upon fraudulent transfer principles that are equitable in origin but now generally prescribed by statute should be described as transferee_liability at law irm tl-n-7311-00 a necessary element of transferee_liability at law or in equity is a tax_liability of the transferor a transferee can be held liable under sec_6901 for the transferor’s income taxes as in this case and for other types of federal taxes as previously discussed the transferor’s income_tax liabilities in this case should be conclusively established in the tax_court case with the transferor that your office is now handling the existence and extent of the transferor’s tax_liabilities may not thereafter be questioned by the transferees in their potential transferee_liability cases except that payments toward the transferor’s tax_liability could reduce the amounts the service may seek from some potential transferees another common element of transferee_liability in equity is for the service to show that it has made all reasonable efforts to collect the tax_liability from the transferor and or that further collection efforts against the transferor would now be futile in this case the transferor dissolved several years ago and has retained no assets so the futility of the service attempting to collect the transferor’s taxes from dissolved new corporation x is established the existence and value of transfers from the transferor to the potential transferees is a third common element of transferee_liability in equity in this case there are three potential direct transfers to be considered the first and largest potential transfer at issue is the payments totaling about a dollars received by the old corporation x shareholders on or about date the primary and alternative recast theories for the substance of these transactions proposed by your office and accepted by corporate are intended in large part to show that this a dollars total was transferred from corporation x to the old corporation x shareholders rather than from the company z group’s special purpose entity to the old corporation x shareholders per the form chosen for the transaction the second and smallest potential transfer at issue is the payments apparently totaling about e dollars that were made by new corporation x then under the control of the company z group to the company z group on or about date recast theories are not necessary to show these payments represented a transfer from corporation x though the recast theories may provide a useful background for considering the other elements of a transferee_liability case these payments may be tested as direct transfers to the company z group and or possibly as indirect transfers to the old corporation x shareholders the third potential transfer at issue is the apparent payment of about h dollars of nol_carryback tax_refund proceeds from new corporation x to the company z group on or after date recast theories are also not necessary to show these apparent payment represented a transfer from corporation x and the facts may show these payments tl-n-7311-00 were also intended as indirect transfers to the old corporation x shareholders as well as direct transfers to the company z group these three transfers must each then be tested by applicable state and federal constructive fraud and actual fraud statutes against the two sets of federal tax debts of the transferor that are at issue in this case the income_tax_liability arising during the year of the direct transfer to the corporation x shareholders the pending tax_deficiency of about i dollars plus applicable penalties and interest for the tax_year ended date and the income_tax liabilities arising from excessive nol_carryback refunds of about h dollars plus applicable penalties and interest received by new corporation x in date as a result of carrying back an excessive nol from the original transfer year to pre-transfer years the necessary elements of a constructive fraud case in addition to the three already described above ie transferor’s debt transfer from transferor to transferee and inability to collect from the transferor may vary somewhat from state to state and from state law to federal_law but the fundamental way that these laws differ from actual fraud laws is that the transferor’s intent in making the transfer is immaterial in a constructive fraud case constructive fraud laws also usually require that the transfer of property be made for inadequate consideration and that the transferor is insolvent or is made insolvent by the transfer or series of transfers see irm the necessary elements of an actual fraud case in addition to the three previously described above i e transferor’s debt transfer from transferor to transferee and inability to collect from the transferor may also vary somewhat from state to state and from state law to federal_law but the common element is generally that the transfer occurred with an actual intent by the transferor to hinder delay or defraud a creditor in the collection of a debt owed under applicable state and federal fraudulent transfer laws the creditor may show the transferor’s actual intent to hinder delay or defraud by circumstantial evidence known generally as badges_of_fraud lack of adequate_consideration and transfers to an insider are common badges_of_fraud but many actual fraud laws do not distinguish between creditors whose debts existed before the transfer and those whose debts came into existence after the transfers intended to hinder delay or defraud see irm in addition to showing that the actual transfers to the old corporation x shareholders were from the transferor_corporation x the primary and alternative recast theories proposed by your office and accepted by corporate are also intended to show that the a dollars paid to the old corporation x shareholders was not made for any actual consideration because corporation x received no value from its shareholders when it either provided them with dividends in a liquidation or redeemed its own stock from its shareholders conversely if the appropriateness of either the primary or alternative recast theories is not shown and the form of the transaction is respected then the corporation x shareholders will argue that the tl-n-7311-00 company z group’s receipt of the corporation x stock in form represented value to the company z group the principal transferee_liability questions raised by your incoming memorandum concerned the appropriate state and federal fraudulent transfer laws for testing the potential transfers in this case and the proper construction of these laws and timing questions regarding the incurrence of the federal_income_tax debts and the transfers for constructive fraud laws that depend upon insolvency at transfer issue primary recast - asset sale followed by liquidation distributions among the factors which support disregarding the company z group’s participation in the transaction are i the company z group never intended to own the corporation x stock or assets ii the company z group never used any of it own funds to finance the acquisition of the corporation x stock and never assumed any real risk with respect to repaying the loan and iii the company z group was paid a fee for participating in the transaction the seminal supreme court decision addressing intermediary arrangements and holding that the incidents of taxation depend upon the substance of the transactions is 324_us_331 an expanded discussion of corporate’s primary and alternative recast analyses may be found further below in addition courts considering transferee_liability cases brought by the service have long found the economic_substance of the transactions to be controlling in determining whether to respect the form of the transactions see mertens law of federal income_taxation sec_53 592_f2d_227 4th cir a transferee_liability case involving virginia law and citing mertens 91_f2d_192 5th cir 101_f2d_992 5th cir 64_tc_1 delpit v commissioner t c memo but see 229_f2d_93 2nd cir issue potential sources of transferee_liability law in this case we have not been told that corporation y in the course of purchasing the corporation x assets contractually made itself secondarily liable at law for paying any of the renamed corporation x tax_liabilities at issue in this case accordingly we have only considered the available secondary sources of law for transferee_liability in equity e g fraudulent transfer theories as now codified in applicable state and federal statutes since corporation x and new corporation x renamed corporation x were at all relevant times incorporated under the laws of virginia and we have not been advised of any significant contacts the transferor had with your incoming memorandum does not discuss any potential fdcpa theories tl-n-7311-00 any other state we agree that the transfers at issue in this case should be treated as made by the transferor in virginia in accordance with 357_us_39 we concur with your proposed testing of the transactions at issue against two virginia laws that allow creditors to set_aside fraudulent transfers virginia has not adopted the multi-state uniform fraudulent conveyance act ufca or the uniform fraudulent transfer act ufta however sections and va code ann respectively describe what are commonly described as actual fraud and constructive fraud grounds for imposing transferee_liability or setting aside a fraudulent transfer section virginia’s actual fraud law provides in pertinent part for this case that every transfer given with intent to delay hinder or defraud creditors shall as to such creditors be void and that this provision shall not affect the title of a purchaser for valuable consideration unless it appear that he had notice of the fraudulent intent of his immediate grantor or of the fraud rendering void the title of such grantor section virginia’s constructive fraud law provides in pertinent part for this case that every transfer which is not upon consideration deemed valuable in law by an insolvent transferor or by a transferor who is thereby rendered insolvent shall be void as to creditors whose debts shall have been contracted at the time it was made but shall not on that account merely be void as to creditors whose debts shall have been contracted or as to purchasers who shall have purchased after it was made whether the service proceeds under sec_6901 to make a personal assessment against a transferee or the united_states files a federal district_court action on the service’s behalf to set_aside a fraudulent transfer of property to the transferee to subject property in the transferee’s hands to the transferor’s federal tax debts the federal government is not barred by any state statute of limitation periods or otherwise labeled claim extinguishment provisions from enforcing its rights under the internal_revenue_code to assess or collect taxes even though the federal government may be relying on state law created grounds for attacking the transfer as an actual or constructive fraud upon the transferor’s creditors this is due to federal supremacy principles since the transferor in this case is still contesting its liability in the tax_court for the unassessed federal income taxes that may later be pursued against these transferees the one year limitation period described in sec_6901 for a transferee assessment against the initial transferees in this case after the assessment_period against the transferor expires and the ten year period described in sec_6502 for filing a federal see 310_us_414 213_f3d_1173 9th cir aff’g 111_tc_172 and cases cited therein irm and tl-n-7311-00 district_court case to set_aside a fraudulent conveyance by the transferor have not even begun to run yet so the service may still utilize any virginia law basis for imposing transferee_liability in this case when the supreme court considered the potential sources of substantive law available to the service to set_aside a fraudulent transfer against creditors under the predecessor provision to sec_6901 in the stern court could choose only between federal decisional pre-erie common_law and applicable state law because congress had not yet enacted a uniform federal_law which addressed the existence and extent of a transferee’s liability for such transfers however effective on date congress enacted the federal debt collection procedure act fdcpa of u s c et seq which describes five potential grounds in sec_3304 for setting aside transfers that are fraudulent as to debts owed the united_states including tax debts three of these fdcpa provisions for setting aside transfers fraudulent as to the united_states involve variants of constructive fraud sub sec_3304 sec_3304 and sec_3304 a fourth fdcpa provision addresses actual fraud sub sec_3304 a fifth fdcpa provision sub sec_3304 involves transfers to insiders of the transferor for even bona_fide antecedent debts if the insider had reasonable_cause to believe the transferor was insolvent in addition to the two virginia law fraudulent transfer provisions described above the service may also consider alternative reliance on any of these five fdcpa provisions as potential grounds in this case for imposing personal transferee_liability under sec_6901 or for filing a federal district_court action to set_aside a fraudulent transfer with respect to the transfers to the corporation x shareholders and to the company z group membersdollar_figure sub sec_3304 describes eleven non-exclusive factors badges_of_fraud to be considered in determining the transferor’s actual intent to hinder delay or defraud a creditor for purposes of the fdcpa including the transfer was to an insider the transfer was of substantially_all the debtor’s assets whether the value of the consideration received by the debtor was reasonably equivalent whether the debtor was see 357_us_39 see u s c b defining debt as including an amount owing to the united_states on account of a tax because there are no antecedent debts to the corporation x shareholders under the service’s recast theories we only consider this potential transferee_liability theory further below with respect to the transferor’s apparent transfers to the company z group see irm and bna transferee_liability portfolio at pages a-1 and a-2 111_tc_172 n aff’d 213_f3d_1173 9th cir tl-n-7311-00 insolvent or became insolvent shortly after the transfer was made and or the transfer occurred shortly before or shortly after a substantial debt was incurred the five potential fdcpa grounds described in u s c sec_3304 that are available to the service for setting aside a transfer that is fraudulent as to a tax debt owed the united_states are as follows sec_3304 transfer fraudulent as to a debt to the united_states a debt arising before transfer - except as provided in sec_3307 a transfer made or obligation incurred by a debtor is fraudulent as to a debt to the united_states which arises before the transfer is made or the obligation is incurred if - a the debtor makes the transfer or incurs the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and b the debtor is insolvent at that time or the debtor becomes insolvent as a result of the transfer or obligation or a the transfer was made to an insider for an antecedent debt the debtor was insolvent at the time and b the insider had reasonable_cause to believe that the debtor was insolvent b transfers without regard to date of judgment - except as provided in sec_3307 a transfer made or obligation incurred by a debtor is fraudulent as to a debt to the united_states whether such debt arises before or after the transfer is made or the obligation is incurred if the debtor makes the transfer or incurs the obligation - a with actual intent to hinder delay or defraud a creditor or b without receiving a reasonably equivalent value in exchange for the transfer or obligation if the debtor - i was engaged or about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction or ii intended to incur or believed or reasonably should have believed that he would incur debts beyond his ability to pay as they became due although the various limitation periods described in u s c sec_3306 for these five fraudulent transfer provisions of the fdcpa may already have expired for many other types of federal debts these limiting provisions do not curtail or limit the rights of the united_states under the internal_revenue_code to collect federal tax debts or to collect amounts collectible in the same manner as taxes eg under sec_6901 dollar_figure as was the case with the virginia law fraudulent transfer provisions described above the one year limitation period described in sec_6901 and sec_11 see u s c b irm tl-n-7311-00 the ten year period described in sec_6502 have not begun to run yet so the service may still utilize any fdcpa law basis for imposing transferee_liability in this case issue transfers to corp x shareholders and the fye date tax debt the mertens treatise and the service’s legal reference guide both describe the general transferee elements of state or federal fraudulent transfer law for constructive fraud as requiring a showing that the transfer was made during or after the period for which the tax_liability of the transferor accrued see mertens law of federal income_taxation sec_53 irm c the generally accepted and applied theory of transferee_liability in equity is that a transferee is retroactively liable for the transferor’s taxes in the year of the transfer and also prior years unless the particular law relied upon goes further eg in actual fraud circumstances and in some constructive law circumstances under the fdcpa and imposes potential liability for tax debts accrued even after the year of the transfer virginia’s constructive fraud law for transferees va code ann treats voluntary transfers by an insolvent transferor or transferor rendered insolvent by the transfer as void as to creditors whose debts shall have been contracted at the time it the transfer was made in a transferee case under sec_6901 and interpreting virginia law the tax_court and fourth circuit both discussed section and determined that a corporate officer was liable as a transferee under this virginia law for real_estate sale proceeds that he received and which also gave rise to the transferor corporation’s federal_income_tax liability pincite see mertens law of federal income_taxation sec_53 101_f2d_992 5th cir stockholder receiving date check held liable as transferee for corporate tax debt for year ending date 351_f2d_1 2nd cir corporate officer receiving proceeds of redeemed airline tickets during fiscal_year ending date held liable as transferee for corporate tax debt for that fiscal_year 47_tc_622 stockholder receiving dollar_figure payment from corporation on date held liable as transferee for corporation’s income_tax_liability for year ended date 21_tc_70 the transferee is retroactively liable for transferor’s taxes in the year of transfer and prior years delpit v commissioner t c memo d’agostino v commissioner t c memo but see 59_f2d_189 2nd cir interpreting scope of a purchaser’s liability assumed at law under a contract pert v commissioner t c memo dicta that the service becomes a taxpayer’s creditor for transferee_liability purposes at the close of a taxable_period in which tax arises tl-n-7311-00 issue during the year of the transfers 592_f2d_227 4th cir aff’g t c memo 1977-dollar_figure virginia’s actual fraud law for transferees va code ann protects purchaser’s for valuable consideration who had no notice of their transferor’s fraudulent intent but it does not condition or limit the liability of other transferees in cases where a transfer has been made with intent to delay hinder or defraud creditors to only those creditors or debts which existed when the transfer occurred in the sellers case the fourth circuit and tax_court also found the transferee liable under section of the virginia law the tax_court stated in its sellers opinion that a transfer is voidable under virginia’s section if made with the intent to delay hinder or defraud either existing or subsequent creditors the first of the fdcpa’s constructive fraud provisions for initial transferees and debts owed to the united_states u s c sec_3304 is similar to virginia’s constructive fraud law it treats transfers that are not made for reasonably equivalent value by an insolvent transferor or transferor rendered insolvent by the transfer as avoidable as to debts to the united_states which arise before the transfer is made or the obligation is incurred there does not appear to be any reported case law which interprets this provision of the fdcpa in relation to any federal tax debts that were incurred during the tax_year that the transferor made insolvent by the federal tax debt made a transfer that was not for reasonably equivalent value however the final supplementary section of the fdcpa u s c sec_3308 explains that except as otherwise provided within the fdcpa principles of law and equity shall apply to actions and proceedings under the fdcpa in accordance with the interpretative guidance provided by sec_3308 and the general equitable origins of fraudulent transfer law we believe that sec_3304 of the fdcpa should be interpreted as including the widely accepted state law gloss described above from the mertens treatise and the transferee cases interpreting virginia law - that a transferor’s tax debt incurred during the tax period the transfer at issue occurred is retroactively treated as having been made before the transfer for purposes of this constructive fraud law the fourth circuit and tax_court in sellers also cited a prior sec_6901 transferee_liability case which had involved a west virginia constructive fraud statute that the sellers court described as being in all material respects the same as the virginia law in that case weinberg trust v commissioner t c memo aff’d sub nom c d construction corp v 451_f2d_470 4th cir 405_us_988 the tax_court relied upon mertens statement of the general_rule that a transferee is retroactively liable for the transferor’s taxes in the year of the transfer and prior years see also in re porter 37_br_56 bankr e d va giving a liberal construction to the meaning of debts contracted in section of virginia’s fraudulent transfer law to include contingent debts that arise from a contract entered into before the transfer though the contingency does not occur until after the transfer tl-n-7311-00 the second and third of the fdcpa’s constructive fraud provisions for initial transferees and debts owed to the united_states sec_3304 and ii apply in the described circumstances whether such debt arises before or after the transfer is made or the obligation is incurred under these two fdcpa provisions the transfer must not have been made for reasonably equivalent value and the transferor in this case either i was engaged or about to engage in a transaction the corporation y asset sale and payments to corporation x stockholders that would leave the transferor with assets that would be unreasonably small in relation to the transferor’s debts including federal tax debts arising from the transaction or ii reasonably should have believed that the transferor would incur total debts including federal tax debts that would be beyond its ability to pay as they became due assuming that the service prevails in its pending tax_court case with the transferor and that one of the service’s alternative recasts of the transactions in this case is sustained the corporation x shareholders should plainly be liable as transferees under either of these two fdcpa constructive fraud provisions for the federal_income_tax liability of corporation x renamed corporation x for its year ended date the fdcpa’s actual fraud provision for initial transferees and debts owed to the united_states sec_3304 also applies whether the federal tax debt arises before or after the transfer is made or the obligation is incurred sec_3304 then provides a non-exclusive list of commonly cited badges_of_fraud which may be considered in determining the transferor’s actual intent to hinder delay or defraud a creditor several of these listed badges_of_fraud apply to the recast transactions at issue in this case with the corporation x shareholders issue transfers to corp x shareholders and the carryback tax debts the illinois fraudulent transfer statute discussed in the alexander case was an actual fraud law that illinois courts had construed previously as applying only to transfers made with the intent to defraud creditors with debts existing at the time of the transfer the alexander court found the service was an existing creditor with respect to the corporation’s income_tax incurred during the tax_year in which the transfers occurred to a shareholder because the court said this tax had been derived from operations conducted prior to the liquidation distribution but the court also found the shareholder was not an existing creditor with respect to a tentative carryback refund claimed by the corporation after it dissolved because these refund proceeds were received by the purchaser of the corporation’s assets and not enjoyed by the shareholder we believe that alexander may be distinguished from the present case first as previously discussed under issue above virginia’s actual fraud law for transferees va code ann has previously been construed as applying to existing or subsequent creditors the fdcpa’s actual fraud law for transferees u s c sec_3304 also applies whether the tax debt arises before or after a transfer is made the same legal rule applies for two of the tl-n-7311-00 fdcpa’s three constructive fraud provisions for transferees sec_3304 and ii they apply in the previously described circumstances found in your case whether the tax debt arises before or after the transfer second further facts developed in your case may show directly or circumstantially that the corporation x shareholders should be treated as indirect beneficiaries of the carryback refunds at issue in year these carryback refunds may have been intended or understood to be part of the long term compensation due to the company z group for earlier facilitating the series of transactions at issue on behalf of the corporation x shareholders and others when a corporation with tax debts makes payments to third parties who are actually owed money in whole in part by the shareholders instead of by the payor corporation the payments may properly be characterized as indirect transfers when made to the shareholders see 91_tc_575 when the carryback refund proceeds were apparently paid over to the company z group on or after date the transferor had incurred all of the federal tax debts at issue and was clearly insolvent accordingly if the corporation x shareholders are found to be indirect beneficiaries of these payments to the company z group then the constructive fraud provisions for transferees under virginia law and the fdcpa which refer to the transferor’s insolvency would cleanly apply to the transactions without disturbing the logic of the distinctions made by the tax_court in the alexander casedollar_figure although the service indicated in that it acquiesced in the alexander decision we note now that the logical distinctions made by the tax_court in that case are debatable during the transfer year in the alexander case and in corporation x’s case the corporation’s tax debt for the transfer and claimed loss_year existed on the same logical level as the corporation’s tax debt for the prior carryback years because the taxes recovered through the tentative nol carrybacks from the transfer loss_year had already been paid the transactions giving rise to the corporation’s tax position later contested by the service had occurred during the transfer year the corporation had decided to cease doing business and was in the process of dissolving during the transfer year so there was no reason the corporation might elect to carry forward its claimed transfer year nol rather than carry back the nol for the tentative carryback refunds at issue and the corporation’s ability to use tentative carryback refund procedures for the transfer year nol ensured that the service would immediately pay the corporation the full requested tentative carryback refunds after the request was filed because the service has no opportunity to review the merits of a taxpayer’s loss_year position under these procedures during the transfer year the transferor’s tax position for the nol_carryback years and its tax debts arising therefrom had thus become a foregone conclusion the transferor’s discretion to defer for a period of time after the transfer loss_year ends the actual filing of an application to request payment of the tentative nol_carryback refunds from the service should not be the decisive factor in whether a shareholder receiving property from the liquidating corporation is liable as a transferee for federal tax debts of this type which tl-n-7311-00 issue the co z group and the immediate payments received in year while the service may recast the transactions facilitated by the company z group in date as described under issue sec_1 and above to treat the company z group as a disregarded intermediary insofar as the transferee_liability of the corporation x shareholders is concerned the service may at the same time take an inconsistent_position in any potential litigation with the company z group members over their potential transferee_liability and hold them to the form of the transactions they facilitated as the tax_court observed in the transferee_liability case of 67_tc_260 we recognize that the substance-form rubric has been successfully used by the commissioner in attacking the form of transactions under circumstances similar to those here but where the purpose of casting the form was to avoid taxes but this does not mean that a party to an agreement may recast his agreement with a third party in order to avoid tax_liability asserted against him by the commissioner in reliance on the terms of the agreement entered into by the parties in the present case for the reasons explained below the old corporation x shareholders on the one hand and the company z group members on the other hand appear to have a strong incentive to assert inconsistent tax positions as defenses to the service’s potential separate transferee_liability actions against each of them the corporation x shareholders can be expected to argue that the form of the transactions the parties selected should be respected the company z group members on the other hand have some incentive to argue that their stock ownership in form should be ignored in favor of the recasts because it could then be more difficult to label the company z group members as insiders when the transfers to them occurred in potential whipsaw situations the service frequently were established for all practical purposes by transactions occurring during the transfer year since the service’s acquiescence in alexander the service has still asserted transferee_liability against the former shareholders of some dissolved corporations for tax debts that arose from excessive post-liquidation nol_carryback refunds see 64_tc_797 fugate v commissioner t c memo accordingly even if the corporation x shareholders are not discovered to be indirect beneficiaries of the nol_carryback refunds at issue there are logically appealing grounds for treating the tax debts arising from these excessive carryback refunds the same as the transfer loss_year tax debts for constructive fraud transferee_liability purposes - as contracted for or existing debts at the time of transfer by a transferor made insolvent by the transfer for purposes of the relevant fraudulent transfer laws of virginia va code ann and the fdcpa u s c sec_3304 which refer to the transferor’s insolvency at the time of transfer accordingly we intend to rethink the service’s acquiescence in the alexander case tl-n-7311-00 does and it permitted to take inconsistent positions see 209_f3d_1281 11th cir 499_f2d_255 10th cir dollar_figure under the form of the above transactions facilitated by the company z group we understand that from at least date through renamed corporation x’s formal dissolution under virginia law new corporation x’s shareholders consisted largely if not entirely of members of the company z group thus at the time the company z group members were apparently paid the fees at issue from retained new corporation x assets the company z group members would be considered insiders of new corporation x under fdcpa sec_3301 sec_28 u s c sec_3301 and under applicable case law decided under state law fraudulent transfer theories when payments have been made for purported debts owed to an insider of a taxpayer the service has sometimes been successful in establishing transferee_liability against the insider by showing the purported debt was fictitious or excessive and that the payment was actually a disguised distribution of the taxpayer’s assets or profits to the insiderdollar_figure these cases tend to be highly factual in nature and your incoming memorandum did not provide very many details that would help us assist you in evaluating the strength of the service’s potential case against the company z group under this theory even if the fees the company z group apparently paid itself from the remaining new corporation x assets on or about date represent the going industry rate for structuring facilitating what the service considers a series of abusive_corporate_tax_shelters for a client s it may be possible for the service to challenge the fees as against public policy and not while the issue need not be decided at this point or even before the service potentially tries and briefs the two sets of transferee cases to the tax_court or other court in a potential refund action the service arguably may also be entitled to prevail in both sets of transferee_liability actions at issue under inconsistent views of the recast transactions unlike the typical whipsaw situation we are not confronted in a transferee_liability case with an either or contest between the two sets of potential transferees just as there may be more than one responsible_person under sec_6672 there may be more than one person liable as a transferee for the same tax owed by the transferor the limitation is that the service may ultimately collect the transferor’s tax only once see 68_f2d_246 3rd cir bonus to shareholders for guaranteeing corporate mortgages treated as profit sharing 21_tc_331 executive salary to owner’s nominee treated as dividends to owner 21_tc_70 salary to officer shareholder treated as excessive_compensation that is actually a distribution of assets 34_fsupp_827 n d cal but see 21_tc_295 united_states v friedman u s t c n d n y tl-n-7311-00 bona_fide debts of new corporation x for transferee_liability purposes for this reason if the payments described above to the company z group were not made for a reasonably equivalent value then we would again follow our analysis under issue above that the payments were made after the tax debt arose during the tax_year and that the transferor was insolvent on account of the tax debt arising during the tax_year when the payment was made thus allowing the service to pursue any of the potential virginia law and fdcpa transferee_liability theories discussed under issue we are uncertain from your incoming memorandum whether these various amounts paid to members of the company z group on or about date were deducted on renamed corporation x’s return for the year ended date and whether the deductibility of these fees by renamed corporation x is somehow arguably at issue in your pending tax_court case with the transferor if so you may wish to seek assistance from branch of apjp in evaluating the extent to which principles of collateral_estoppel or res_judicata may affect the service’s ability to pursue the potential theory that these payments were not made for reasonably equivalent value alternatively without challenging whether corporation x received reasonably equivalent value in exchange for these amounts paid to the company z group on or about date the service may simply assert that the transfer was made to an insider the company z group for an antecedent debt at a time when the transferor_corporation x was insolvent and that the insider had reasonable_cause to believe the transferor was insolvent within the meaning of fdcpa sec_3304 sec_28 u s c sec_3304 as previously discussed this theory requires that the company z group be held to the form of the transactions it facilitated making it an insider when the payments were made and following our analysis under issue above that the payments were made after the tax debt arose during the tax_year and that the transferor was insolvent on account of the tax debt arising during the tax_year when the payment was made it also requires the service to show that the company z group should reasonably have known that the offsetting loss-producing transactions that it involved new corporation x in during the transfer_tax year were not valid to eliminate the new corporation x tax_liability resulting from the corporation y sale your incoming memorandum did not mention potential sec_6700 penalties against the company z group but the service has given notice that it considers the type of transactions the company z group facilitated in this case to be abusive tax_shelters see chief_counsel notices date and date although most of the company z group’s activities in facilitating these intermediate transaction tax_shelters had apparently occurred by date it seems likely that much of the evidence the service would need to consider in a sec_6700 investigation of the company z group in connection with these transactions has already been obtained by the service or is likely to have been retained by the representatives of renamed corporation x in connection with the pending tax_court case your office is handling there is no period of limitation for assessment of the sec_6700 penalty see lamb v united_states f 2d tl-n-7311-00 8th cir 908_f2d_18 5th cir while the sec_6700 penalty is generally only equal to dollar_figure for a person liable for each activity described in sec_6700 it may be possible to treat the purported sale of corporation x stock by each corporation x shareholder as a separate transaction i e multiple sales if there were many shareholders subject_to the penalty in addition to the other steps you have already noted in this abusive series of transactions if you wish to pursue sec_6700 penalties against the company z group and its responsible personnel in addition to the transferee_liability discussed herein please seek advice directly from branch of apjp issue the co z group and transfers of nol_carryback refund proceeds the company z group’s potential transferee_liability with respect to the nol_carryback refund proceeds of new corporation x that it apparently distributed to its members in or after date follows along the same lines of analysis discussed under issue except that there would appear to be fewer potential legal hurdles which may need to be crossed first the company z group’s right as the controlling shareholders of dissolving new corporation x to appropriate these nol_carryback refund proceeds to itself in year may not have even been disguised by new corporation x as payments upon any purported debts and in any event the payments are not likely to be supported by any genuine arms length negotiations over contractual terms between new corporation x’s shareholders and the payees controlled by these shareholders second the tax_court case involving new corporation x that is being handled by your office does not involve the tax_year of new corporation x the year ending date in which these distributions were made to the company z group and possibly deducted by new corporation x so there should be no possible collateral_estoppel res_judicata hurdle that needs to be considered or crossed with respect to these distributions in year third by any potential measure of tax debt accrual the tax debts at issue had been incurred and therefore made new corporation x insolvent by the time these nol_carryback refund proceeds were distributed to the company z group expanded discussion of corporate’s recast analysis issue the primary recast for corporation x’s shareholders from the facts described the company z group’s participation in the transaction was that of a mere intermediary and lacked economic_substance consequently the company z group’s participation in the transaction should be disregarded once the company z group’s participation in the transaction is disregarded the transaction may be recast as a direct sale of assets by corporation x to tl-n-7311-00 corporation y followed by a liquidating_distribution of the sale proceeds by corporation x to the original corporation x shareholdersdollar_figure several factors in the instant case support disregarding the company z group’s participation in the transaction first company z and its special purpose entity never intended to own the corporation x stock or assets the original negotiations relating to corporation x were between corporation x and the corporation x shareholders and corporation y the company z group was interjected into the transaction only after the discussions between the corporation x shareholders and corporation y reached an impasse after a discussion with corporation y company z via the company z group agreed to facilitate the transaction between the corporation x shareholders and corporation y the letters of intent between company z and the corporation x shareholders and company z and corporation y illuminate that company z’s sole role was that of an intermediary that never intended to have any real ownership relating to corporation x in fact the letters of intent make clear the company z group’s role as an intermediary by specifically providing that company z’s purchase of the corporation x stock was conditioned on corporation y’s purchase of the corporation x assets and corporation y’s purchase of the corporation x assets was conditioned on company z’s purchase of the corporation x stock further the actual stock sale by the corporation x shareholders to company z’s special purpose entity and the actual asset sale by corporation x to corporation y occurred within one day of each other the only activity that occurred during that two day period with respect to the company z group and corporation x was a series of transfers by the company z group of leases and the loss stock that corporation x used to shelter its gain from the sale of its assets to corporation y and generate a refund consequently company z and its special purpose entity never had any real control_over corporation x and never enjoyed the normal benefits and burdens associated with ownership murry v commissioner t c memo second company z and its special purpose entity never used any of its own funds to finance the acquisition of the corporation x stock and never assumed any real risk with respect to repaying the loan in order to finance the purchase of the corporation x stock company z’s special purpose entity obtained a bridge loan from a bank in the amount of a dollars immediately after company z’s special purpose entity acquired the corporation x stock the special purpose entity merged with and into corporation x with corporation x assuming the loan obligation as a result of the merger this obligation was immediately repaid by corporation x after the sale of its assets - one day after the stock sale given the prearranged steps the liquidating_distribution would include certain account receivables that were not sold to corporation y tl-n-7311-00 of this transaction it is clear that corporation x not company z’s special purpose entity was the party responsible for repaying the loan third the company z group was paid a fee for participating in the transaction this payment of a fee further reflects the company z group’s role as an intermediary the fee consisted of amounts directly paid_by corporation x to the company z group and officers and directors of the company z group as well as amounts resulting from the refund the only purpose for the company z group’s participation in the transaction was to shelter corporation x’s inherent gain in its assets and collect a fee therefore the company z group’s participation in the transaction should be disregarded the seminal supreme court decision addressing intermediary arrangements is 324_us_331 in court holding the court recognized that entities may be disregarded in determining a transaction’s true substance by providing that the incidence of taxation depends upon the substance of a transaction the tax consequences which arise from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal_title rather the transaction must be viewed as a whole and each step from the commencement of negotiations to the consummation of the sale is relevant a sale by one person cannot be transformed into a sale by another by using the latter as a conduit through which to pass title to permit the true nature of a transaction to be disguised by mere formalisms which exist solely to alter tax_liabilities would seriously impede the effective administration of the tax policies of congress id pincite several authorities have focused on the substance of the transaction in determining how a transaction should be treated for federal_income_tax purposes see 154_f3d_630 6th cir taxpayer’s contribution of property to his controlled_corporation followed by corporation’s sale of property at a gain that was offset by losses and subsequent distribution of the sale proceeds to the taxpayer treated as a direct sale by taxpayer of the property corporation treated as a mere conduit 88_tc_122 bank’s foreclosure on partnership’s property and bank’s subsequent sale of property to another partnership related to the first partnership pursuant to an understanding between the bank the first partnership treated as an indirect sale by the first partnership to the related partnership revrul_91_47 1991_2_cb_16 pursuant to an understanding between unrelated corporations p and d p forms a new corporation newco that acquires d’s outstanding debt at a discount and p subsequently sells the newco stock to d in an attempt to help d avoid discharge_of_indebtedness income stock sale disregarded and transaction recast so that d is treated as acquiring its indebtedness directly from p see also del commercial properties inc v commissioner t c memo 54_tc_1305 tl-n-7311-00 46_tc_32 revrul_70_140 1970_1_cb_73 once the company z group’s participation in the transaction is disregarded there are facts to support treating the transaction as a direct sale of assets by corporation x to corporation y followed by a liquidating_distribution of the sale proceeds by corporation x to its original shareholders as discussed above there were prior negotiations for an asset sale between corporation x and corporation y and an asset sale did occur in fact additionally as part of a prearranged plan the corporation x asset sale was the source of the payments to the original corporation x shareholders for their stock with the bank serving as a mere facilitator for that payment this is consistent with treating the cash received by the original corporation x shareholders as a liquidating_distribution finally the fact that corporation x remained in existence until date should not alter the overall recast after corporation x’s asset sale to corporation y and the distribution of the sale proceeds to the original corporation x shareholders corporation x had no assets no business activity and no ability to satisfy its liabilities consequently corporation x should be treated as having liquidated following the sale of its assets see sec_1_332-2 rev_rul 1961_2_cb_251 issue the alternative recast for corporation x shareholders assuming arguendo that corporation x is not treated as having liquidated following the sale of its assets to corporation y and the company z group’s receipt of the corporation x stock is respected the transaction should be treated as a redemption by corporation x of its stock from the original corporation x shareholders rendering corporation x unable to satisfy its federal tax_liability resulting from its asset sale to corporation y with the company z group receiving corporation x stock for services the company z group member’s transfer of the leases and loss stock should be disregarded with the losses generated by corporation x’s subsequent transfer of the leases and loss stock being disallowed with respect to recasting the purchase by company z’s special purpose entity of the corporation x stock from the original corporation x shareholders as corporation x’s redemption of its stock from its original shareholders the facts make clear that corporation x and not company z’s special purpose entity was the source of the funds used to acquire the stock from the original corporation x shareholders as discussed above company z’s special purpose entity was a newly formed transitory corporation that used the funds from a bank loan to acquire the corporation x stock immediately after its acquisition of corporation x and as part of a prearranged plan company z’s special purpose entity merged with and into corporation x with corporation x assuming the liability for the loan used to acquire its stock corporation x then immediately repaid the loan obligation with the proceeds from the sale of its assets and certain account receivables not sold to corporation y because corporation x and not the company z group was the true source of the funds used to acquire the stock from the original corporation x tl-n-7311-00 shareholders corporation x should be treated as redeeming its stock from its original shareholders for a dollars see revrul_78_250 1978_1_cb_83 430_f2d_1185 5th cir ultimately as part of a prearranged plan corporation x financed the redemption of its stock from its original shareholders with the proceeds of the sale of its assets to corporation y with the bank serving as a mere facilitator of the redemptiondollar_figure as a result of the distribution of the cash to the original shareholders in redemption of their stock corporation x was unable to satisfy its federal tax_liability resulting from its asset sale to corporation y to the extent the members of the company z group are treated as owning stock in corporation x the members of the company z group should be treated as receiving such stock in return for their participation in the transaction services rather than for the company z group members’ transfer of leases and loss stock as discussed in your incoming memorandum ample authority exists for concluding that the lease and loss stock transfers lacked a business_purpose and economic_substance the company z group used corporation x as a mere conduit for transferring the leases and loss stock to generate the corporation x losses that offset the gain on corporation x’s asset sale to corporation y while also generating a refund of approximately h dollars consequently because the transfer of the leases and loss stock lacked business_purpose and economic_substance and corporation x served as a mere intermediary with respect to such items corporation x should not be permitted to recognize any loss with respect to the transfer of the leases and loss stock accordingly such corporation x stock should be treated as being received by the members of the company z group for services if you have any technical questions regarding these recasts please call the attorney in branch of corporate assigned to this case if you have any questions regarding the discussion of transferee_liability please call the attorney in my branch assigned to this case pincite-3630 the tax treatment of the corporation x shareholders resulting from the redemption should be tested under sec_302 the authorities discussed above relating to disregarding intermediaries would apply to treat corporation x as a mere intermediary with respect to the company z group’s transfer of leases and loss stock to corporation x and corporation x’s immediate retransfer of such leases and loss stock


tax_exempt_and_government_entities_division release number release date date date legend org organization name org address department of the treasury internal_revenue_service te_ge eo examination fulton street room brooklyn ny xx date address address uil taxpayer_identification_number person to contact identification_number contact telephone number last date for filing a pleading with the tax_court the claims_court or the united_states district_court for the district of columbia dear this is a final_determination regarding your exempt status under sec_501 of the internal_revenue_code irc recognition of your exemption from federal_income_tax as an organization described in internal_revenue_code sec_501 is retroactively revoked to june 20xx because you have not established that you are organized and operated exclusively for exempt purposes sec_501 exempts from taxation organizations which are organized and operated exclusively for religious charitable or educational_purposes or fostering national or international amateur sports competition you failed to meet the requirements of sec_1_501_c_3_-1 in that you are not organized exclusively for an exempt_purpose your primary activity is on a local level with adult members we are therefore revoking your exemption from federal_income_tax as an organization described in sec_501 of the internal_revenue_code effective june 20xx contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 these returns should be filed with the appropriate service_center for all years beginning june 20xx processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must file a pleading seeking a declaratory_judgment in the united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia before the day after the date this final_determination was mailed to you please contact the clerk of the appropriate court for rules regarding filing pleadings for declaratory judgments and refer to the enclosed publication you may write to these courts at the following addresses you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call too-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours marsha a ramirez director eo examinations i form 886a name of taxpayet explanation of items may 20xx department of the treasury - internal_revenue_service schedule no or exhibit org legend org organization name xx date motto motto issue whether the organization is a charitable_organization within the definition of c of the internal_revenue_code facts org org was originally classified as a c org is a club of adult men ranging from the ages of to years old the primary activity is motto ona local level during the motto season org also checks motto motto and motto to see that they meet specifications there is a yearly local tournament and banquet in 19xx the articles were amended to add organized and operated at all times exclusively for charitable and educational_purposes to foster regional national and international motto competition irs reclassified the organization to a c the prior agent audited org several times and approved of their status as a c law internal_revenue_code c grants exemption to an organization that is educational charitable or fostering national or international amateur sports competition amateur sports organizations may qualify under sec_501 in the following ways youth sec_1 c -1 d of the regulations an exempt educational_organization sec_1 c -1 d of the regulations the organization may be educational if it teaches sports to youth or is affiliated with the organization may be charitable if it develops promotes and regulates a sport for the organization is organized and operated to foster national or international amateur the organization is a qualified_amateur_sports_organization under sec_501 sec_501 requires the organization to be organized and operated exclusively to foster national or international sports competition it can do this by a conducting national or international sports competitions or b supporting and developing amateur athletes for national or international sports competitions sports competition but does not provide athletic_facilities or equipment form 886-acev department of the treasury - internal_revenue_service page -1- form 886a name of taxpayet department of the treasury - internal_revenue_service explanation of items schedule no or exhibit may 20xx org sec_501g allows the organization to provide facilities and equipment an organization must have links to national or international competition an organization does not qualify under sec_501 if its activities are merely local government’s position org org does not meet the requirements of a c it is not educational charitable or fostering national or international amateur sports competition taxpayer’s position the organization agrees with the revocation of their c status conclusion org does not qualify as a c their primary activity is motto on a local level with adult members this is not educational charitable or fostering national or international competition accordingly the organization’s exempt status is revoked other information our review of your return form_990 and related records indicated that you failed to file all required forms under sec_6041 through of the internal_revenue_code of 19xx you are required to file an information_return form_1099 for payments of dollar_figure or more during a calendar_year made to individuals and unincorporated entities for rent compensation services or other fixed or determinable gains profits and income even though we have now obtained these returns your organization is responsible for timely filing the appropriate forms in the future as part of our examination we determined that you were not liable for filing form 990-t on unrelated_business_income you are reminded that form 990-t is required to be filed when you have gross_receipts from unrelated business activities in excess of dollar_figure during our examination we noted that you did not report your group exemption on your form_990 in the future please record this number our examination showed you did not maintain sufficient records regarding reimbursed expenses in the future you should maintain adequate_records form 886-acev department of the treasury - internal_revenue_service page -2- tax_exempt_and_government_entities_division org address department of the treasury internal_revenue_service tax exempt government entities commerce st dallas tx taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter catalog number 34809f


significant index number department of the treasury internal_revenue_service washington d c commissioner tax_exempt_and_government_entities_division aug tep ek re taxpayer dear this letter constitutes notice that approval has been granted for your request for a 5-year automatic_extension for amortizing the unfunded liabilities as of date for the above-named plan which are described in sec_431 and sec_431 of the internal_revenue_code code and sec_304 b and b of the employee_retirement_income_security_act_of_1974 erisa this extension is effective with the plan_year beginning date this extension applies to the eligible amortization charge bases established as of date the extension of the amortization periods of the unfunded liabilities of the plan was granted in accordance with sec_431 of the code sec_431 of the code requires the secretary to extend the period of time required to amortize any unfunded_liability of a plan for a period of time not in excess of years if the plan submits an application meeting the criteria stated in sec_431 the plan has submitted the required information to meet the criteria in sec_431 including a certification from the plan's actuary that i absent the extension under subparagraph a the plan would have an accumulated_funding_deficiency in the current plan_year or any of the succeeding plan years ii the plan_sponsor has adopted a plan to improve the plan's funding status iii the plan is projected to have sufficient assets to timely pay expected benefits and anticipated expenditures over the amortization period as extended and iv the notice required under paragraph a has been provided we have sent a copy of this letter to the ' and to the this ruling is directed only to the taxpayer that requested it sec_61 k of the internal_revenue_code provides that it may not be used or cited by others as precedent if you require further assistance in this matter please contact sincerely yours in sg david m ziegler manager ep actuarial group


internal_revenue_service number release date index number ------------------------------------- ---------------------------------------------- --------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact ------------------------- id no ------------- telephone number --------------------- refer reply to cc psi b1 plr-139205-07 date date ------------------- ------------------------------------- this is in response to a letter dated date and subsequent legend x --------------------------------------------- state date ------------------ dear ----------------- correspondence submitted on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election under sec_301_7701-3 to be treated as a corporation for federal tax purposes and relief to file a late s_corporation_election under sec_1362 of the internal_revenue_code facts liability company under the laws of state x intended to elect to be treated as an association_taxable_as_a_corporation and to then elect to be treated as an s_corporation for federal tax purposes with both elections effective date however neither form_8832 entity classification election nor form_2553 election by a small_business_corporation was timely filed law and analysis corporation under sec_301_7701-2 or an eligible sec_301_7701-3 provides that a business_entity that is not classified as a according to the information submitted x was formed on date as a limited sec_301_7701-3 provides that an eligible_entity may elect to be sec_301_7701-3 provides that an election made under sec_301 plr-139205-07 entity can elect its classification for federal tax purposes a business_entity is an entity recognized for federal tax purposes that is not properly classified as a_trust under sec_301_7701-4 or otherwise subject_to special treatment under the code sec_301_7701-2 an eligible_entity with a single owner can elect either to be classified either as an association or as an entity separate from its owner sec_301_7701-3 provides that unless a domestic eligible_entity elects otherwise the entity is disregarded as an entity separate from its owner if it has a single owner classified other than as provided under sec_301_7701-3 by filing form_8832 with the service_center designated on the form c i will be effective on the date specified by the entity on form_8832 or on the date filed if no such date is specified on the election form the effective date specified on form_8832 can not be more than days prior to the date on which the election is filed nor more than months after the date on which the election is filed under sec_301_9100-1 the commissioner may grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i whose due_date is prescribed by a regulation published in the federal_register or a revenue_ruling revenue_procedure notice or announcement published in the internal_revenue_bulletin commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-2 provides automatic extensions of time for making certain elections sec_301_9100-3 provides extensions of time for making elections that do not meet the requirements of sec_301_9100-2 requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 treated as an s_corporation is made within the first two and one-half months of a corporation's taxable_year then sec_1362 provides when an s election becomes effective if an s election sec_301_9100-1 defines the term regulatory election as an election sec_1362 provides that a small_business_corporation can elect to be sec_301_9100-1 through provide the standards the plr-139205-07 that corporation will be treated as an s_corporation for the year in which the election was made if an election is made after the first two and one-half months of a corporation's taxable_year then the corporation will generally not be treated as an s_corporation until the following taxable_year sec_1362 provides that if a an election under sec_1362 is made for any taxable_year after the date prescribed by sec_1362 for making such election for such taxable_year or no such election is made for any taxable_year and b the secretary determines that there was reasonable_cause for the failure to timely make such election the secretary may treat such an election as timely made for such taxable_year conclusion based solely on the facts submitted and the representations made we conclude that x has satisfied the requirements of sec_301_9100-1 and sec_301_9100-3 as a result x is granted an extension of time of days from the date of this letter to file a properly executed form_8832 with the appropriate service_center electing to be treated as an association_taxable_as_a_corporation for federal tax purposes effective date a copy of this letter should be attached to the election in addition based solely on the facts submitted and the representations made and provided that x otherwise qualifies as an s_corporation we conclude that x will be recognized as an s_corporation effective date a form_2553 along with a copy of this letter must be forwarded to the appropriate service_center within days from the date of this letter concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter provides that it may not be used or cited as precedent this ruling is directed only to the taxpayer requesting it sec_6110 except as expressly provided herein no opinion is expressed or implied plr-139205-07 in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representative sincerely william p o'shea associate chief_counsel passthroughs special industries enclosures copy of this letter copy for sec_6110 purposes