Opinion ID: 2781791
Heading Depth: 2
Heading Rank: 2

Heading: Transferee Liability Under Wisconsin Law

Text: Establishing transferee status under § 6901 is only the first step in the analysis. The Commissioner also must establish substantive liability under state law. Stern, 357 U.S. at 45. Here, the tax court found the shareholders liable under two constructive-fraud provisions of the Uniform Fraudulent Transfer Act (“UFTA”), codified in Wisconsin at WIS. STAT. §§ 242.04(1)(b), 242.05(1), and also under a provision in Wisconsin’s law of corporate dissolution, id. § 180.1408. When substantive liability is grounded in the law of fraudulent transfer, the issue of transferee status arises at this second step in the analysis as well. The Commissioner takes the position that transferee status need only be determined once. In other words, if the court recharacterizes or collapses a transaction to determine transferee status under § 6901, then substantive liability is determined by applying state law to the transaction as recast under federal law. The shareholders argue that the two inquiries—transferee status under § 6901 and substantive liability—are independent. The Commissioner’s position is hard to square with the Supreme Court’s decision in Stern. As we’ve explained, Stern held that § 6901 is “purely a procedural statute,” 357 U.S. at 44, and “neither creates nor defines a substantive liability but provides merely a new procedure by which the Government may collect taxes,” id. at 42. Accordingly, when the 20 Nos. 12-3144, et al. Commissioner invokes § 6901 to collect an unpaid tax debt from a transferee, the federal government’s substantive rights as a creditor “are precisely those which other creditors would have under [state] law.” Id. at 47. This suggests that transferee status under § 6901 and substantive liability under state law are separate and independent inquiries. Every circuit that has addressed this question has rejected the Commissioner’s position and instead required independent determinations of transferee status under federal law and substantive liability under state law. See Salus Mundi Found. v. Comm’r, No. 12–72527, 2014 WL 7240010, at  (9th Cir. Dec. 22, 2014) (“We conclude that the two requirements of 26 U.S.C. § 6901—transferee status under federal law and substantive liability under state law—are separate and independent inquiries.”); Diebold Found., Inc. v. Comm’r, 736 F.3d 172, 185 (2d Cir. 2013) (“This symmetry of rights contemplated under the statute must lead to the conclusion that the requirements of § 6901 are indeed independent.”); Frank Sawyer Trust of May 1992 v. Comm’r, 712 F.3d 597, 605 (1st Cir. 2013) (“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.”); Starnes v. Comm’r, 680 F.3d 417, 429 (4th Cir. 2012) (“In short, we conclude Stern forecloses the Commissioner’s efforts to recast transactions under federal law before applying state law to a particular set of transactions. An alleged transferee’s substantive liability for another taxpayer’s unpaid taxes is purely a question of state Nos. 12-3144, et al. 21 law, without an antecedent federal-law recasting of the disputed transactions.”). This conclusion flows from Stern’s twin holdings that (1) § 6901 is a procedural statute only; and (2) state law defines both the existence and the extent of substantive liability, placing the federal government in no better position than any other creditor. Allowing federal tax doctrines to dictate substantive outcomes under state law could give the federal government an advantage over other creditors. See Salus Mundi Found., 2014 WL 7240010, at –8; Diebold, 736 F.3d at 185; Frank Sawyer Trust, 712 F.3d at 604–05; Starnes, 680 F.3d at 428–30. The decisions of our sister circuits rest on a sound reading of Stern. We see no reason to disagree. But the independent state-law inquiry will make a difference in the outcome only when there is a conflict between the applicable federal tax doctrine and the state law that determines substantive liability. See, e.g., Diebold, 736 F.3d at 185 (noting that recasting a transaction under state law “may require, as it does in this case, a different showing” than doing so under federal law). We have no such conflict here. Wisconsin’s version of the UFTA, like § 6901, defines the term “transfer” very broadly: “‘Transfer’ means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease and creation of a lien or other encumbrance.” WIS. STAT. 22 Nos. 12-3144, et al. § 242.01(12).8 Nothing suggests this definition is narrower than the definition in § 6901. Moreover, state fraudulent-transfer law is itself flexible and looks to equitable principles like “substance over form,” just like the federal tax doctrines we have explained above. See Boyer v. Crown Stock Distrib., Inc., 587 F.3d 787, 793 (7th Cir. 2009) (applying Indiana law and citing DOUGLAS G. BAIRD, ELEMENTS OF BANKRUPTCY 153–54 (4th ed. 2006)). More to the point here, Wisconsin’s codification of the UFTA expressly incorporates equitable principles, WIS. STAT. § 242.10 (“Unless displaced by this chapter, the principles of law and equity … supplement this chapter.”), and Wisconsin has long followed the general rule that “[e]quity looks to substance and not to form,” Cunneen v. Kalscheuer, 206 N.W. 917, 918 (Wis. 1926). Wisconsin courts use the “substance over form” principle in a variety of contexts, most notably including tax cases. See, e.g., Wis. Dep’t of Revenue v. River City Refuse Removal, Inc., 712 N.W.2d 351, 363 n.19 (Wis. Ct. App. 2006) (explaining that the substance-over-form principle governs the treatment of a 8 The definition of “transfer” in the UFTA is largely based on the definition of “transfer” found in the Bankruptcy Code, UNIF. FRAUDULENT TRANSFER ACT § 1 cmt. 12, 7A(II) U.L.A. 17 (2006), which we have called “expansive,” Warsco v. Preferred Technical Grp., 258 F.3d 557, 564 (7th Cir. 2001); see also In re Bajgar, 104 F.3d 495, 498 (1st Cir. 1997) (“The Bankruptcy Code, moreover, defines the term ‘transfer’ broadly … . [T]he legislative history of Section 101(54), which defines ‘transfer,’ explains that ‘[t]he definition of transfer is as broad as possible.’” (quoting S. REP. NO. 989, 95th Cong. 27 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5813; H.R. REP. NO. 595, 95th Cong. 314 (1977))).” Nos. 12-3144, et al. 23 taxpayer’s activities and transactions for tax purposes); G & G Trucking, Inc. v. Wis. Dep’t of Revenue, 672 N.W.2d 80, 85–86 (Wis. Ct. App. 2003) (same); see also Gebhardt v. City of West Allis, 278 N.W.2d 465, 467 (Wis. 1979) (same); In re Mader’s Store for Men, Inc., 254 N.W.2d 171, 184–85 (Wis. 1977) (characterizing a loan in receivership proceedings); State v. J. C. Penney Co., 179 N.W.2d 641, 647 (Wis. 1970) (“In cases of alleged usury, this court will look through the form of the agreement to the substance.”). In light of the broad definition of “transfer” in Wisconsin fraudulent-transfer law and the general applicability of substance-over-form analysis, the shareholders are properly deemed to be transferees under state law as well as federal. The shareholders insist that the stock sale cannot be “recast” or “recharacterized” under Wisconsin fraudulenttransfer law unless the Commissioner proves that they knew Midcoast’s scheme was an illegal tax shelter or was otherwise fraudulent.9 They cite no authority for this proposition, and indeed, Wisconsin law is to the contrary. The Wisconsin Supreme Court has explained that subjective intent and good faith play no role in the application of the constructive-fraud provisions of Wisconsin’s UFTA. See Badger State Bank v. Taylor, 688 N.W.2d 439, 447–49 (Wis. 2004) (“The focus in ‘constructive 9 At trial the parties stipulated that although the shareholders “knew or should have known that Midcoast intended to claim a loss to offset the gain on the asset sale, they did not know and had no reason to know that respondent [IRS] would characterize it as an abusive tax shelter and/or disallow the loss.” As we explain in the text, under the constructive-fraud provisions of the Wisconsin UFTA, whether the shareholders knew the scheme was illegal or fraudulent is irrelevant. 24 Nos. 12-3144, et al. fraud’ [cases] shifts from a subjective intent to an objective result.”). So the shareholders’ extensive emphasis on their due diligence and lack of knowledge of illegality is simply beside the point. Moving now to the tax court’s application of the constructive-fraud provisions of the Wisconsin UFTA, we find no error. Under section 242.04(1)(b), a transferee is liable to a creditor whose claim arose before or after the transfer if the debtor made the transfer “[w]ithout receiving a reasonably equivalent value in exchange for the transfer or obligation,” and “[i]ntended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.” WIS. STAT. § 242.04(1)(b)(2) (emphasis added). Under section 242.05(1), a transferee is liable to a creditor whose claim arose before the transfer if the debtor made the transfer “without receiving a reasonably equivalent value” and “the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.” Id. § 242.05(1). The tax court found the shareholders liable for Woodside’s tax debt under both provisions. As a threshold matter, the asset sale—the triggering event for the tax liability—occurred before the transfer of Woodside’s cash to the shareholders, so both constructive-fraud provisions are in play.10 The tax court found 10 In their reply brief, the shareholders argue for the first time that the Commissioner failed to prove several elements of UFTA liability, including whether the IRS was a creditor at the relevant time; they also assert a goodfaith defense under section 242.08 of the Wisconsin Statutes. These (continued...) Nos. 12-3144, et al. 25 that the cash from Woodside’s asset sale was transferred to the shareholders “without receiving a reasonably equivalent value,” a requirement common to both constructive-fraud provisions. Indeed, the court found that Woodside received nothing. The court also found that the transaction left Woodside insolvent, a requirement for liability under section 242.05(1). Woodside’s tax liability exceeded $750,000, and it had just under $453,000 cash remaining after the shareholders were paid.11 See id. § 242.02(2) (“A debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.”). The shareholders’ only challenge to these findings is an unsupported and implausible claim that the $1.2 million loan receivable had real value. As we’ve explained, however, the tax court found that the Shapiro loan and the receivable were mere accounting tricks devoid of actual substance or value: a sham loan begat a sham receivable. The record amply supports this finding. Finally, the tax court found that the shareholders knew or should have known that Woodside’s federal tax liability could not and would not be paid. This finding is also well supported by the record. What was left in Woodside’s new bank account 10 (...continued) arguments come far too late. See Griffin v. Bell, 694 F.3d 817, 822 (7th Cir. 2012) (“[A]rguments raised for the first time in a reply brief are deemed waived.”). 11 Moreover, Midcoast drained most of the remaining cash from the corporation within four days of the closing. 26 Nos. 12-3144, et al. after the transaction was insufficient to cover the tax liability. And the entire transaction was premised on the assumption that Midcoast would offset the tax liability by a net-operatingloss carryback; in other words, the transaction was premised on the assumption that the taxes would not be paid. Or as the tax court put it, the “record is replete with notice to [the shareholders] that [Midcoast] never intended to pay Woodside Ranch’s [f]ederal income tax liability.” Accordingly, we conclude that the tax court did not clearly err in finding the shareholders liable for Woodside’s tax debt under sections 242.04(1)(b) and 242.05(1). This conclusion is sufficient to sustain transferee liability under § 6901; we do not need to address the tax court’s alternative findings under section 180.1408, the corporate dissolution statute. AFFIRMED.