Opinion ID: 856772
Heading Depth: 3
Heading Rank: 1

Heading: Skipping Ahead

Text: The IRS first argues that the Tax Court erred by skip[ping] ahead to the state law issues before resolving the question of whether the Trust is a transferee for purposes of 26 U.S.C. § 6901. After reviewing the Service's claims, we see no reason why the Tax Court should have addressed the federal tax law question before the Massachusetts law question. While it is true that the IRS can only use the § 6901 procedural mechanism to collect taxes from a transferee as that term is defined by federal law, see 26 U.S.C. § 6901(h), it is also true that the IRS can only rely on the Massachusetts Uniform Fraudulent Transfer Act to collect from a transferee as that term is construed for the purposes of state law. Stern, 357 U.S. at 45 (existence and extent of the transferee's liability should be determined by state law); Starnes v. Comm'r, 680 F.3d 417, 419 (4th Cir. 2012). Thus, if the Trust was not a transferee of the companies for purposes of Massachusetts fraudulent transfer law, then whether or not it was a transferee for purposes of § 6901 is irrelevant. And if the Tax Court believed that it could resolve the case more expeditiously by deciding the question of state law liability before the federal tax law question, then it was not error for the court to consider the issues in that order. See Starnes, 680 F.3d at 430 (because the Commissioner has failed to prove the [f]ormer [s]hareholders are liable under state law . . . , we need not and -17- do not decide whether they are . . . 'transferees' . . . within the meaning of § 6901). The IRS also argues that Massachusetts courts apply something akin to the federal substance-over-form doctrine in fraudulent transfer cases. See, e.g., Galdi v. Caribbean Sugar Co., 99 N.E.2d 69, 71-72 (Mass. 1951). Moreover, the IRS contends that under the substance-over-form doctrine, the objective economic realities--not the parties' subjective beliefs--determine the characterization of a transaction. See, e.g., Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978) (objective economic realities are controlling). But although Massachusetts' highest court has said that [u]ndoubtedly, equity, particularly in cases of alleged fraud, will disregard the form to ascertain the substance of a transaction, the court said in the same breath that before it will disregard the form of a transaction, the litigants challenging the transaction's form must demonstrate that both parties to the transaction structured it with an intent to hinder, delay, and defraud. Galdi, 99 N.E.2d at 71-72. And here, the Tax Court found no such intent on the part of the Trust.1 1 The IRS further contends that the Tax Court erred by finding that there was no circular flow of funds among the Trust, the corporations, and Fortrend. But the circular flow of funds rule is an element of the tax law doctrine of substance over form. See, e.g., Merryman v. Comm'r, 873 F.2d 879, 882 (5th Cir. 1989) (a circular flow of funds among related entities does not indicate a substantive economic transaction for tax purposes). While Massachusetts courts may consider a circular flow of money to be evidence of a sham transaction in the context of a state tax -18-