Opinion ID: 2763493
Heading Depth: 2
Heading Rank: 2

Heading: The Second Circuit’s Decision in Diebold

Text: Foundation v. Commissioner Because the Diebold children’s foundations were organized in Arizona, Connecticut, and South Carolina, the Tax Court’s decisions in their favor were appealable to the Ninth, Second, and Fourth Circuits, respectively. The IRS did not appeal the decision in favor of the Ceres Foundation to the Fourth Circuit. But the IRS did appeal the decision in favor of the successor Diebold Foundation to the Second Circuit. See Diebold, 736 F.3d at 172. The Second Circuit concluded that under New York law, the Double-D shareholders had constructive knowledge of the tax avoidance scheme and were therefore liable under state law; the Second Circuit vacated the Tax Court’s decision and remanded to the Tax Court to determine transferee status under federal law and the applicable statute of limitations. Id. at 190. In reaching that conclusion, the court reasoned that the following facts, among others, showed a failure of ordinary diligence and active avoidance of the truth by the shareholders: (1) the shareholders’ recognition of the “problem” of the “tax liability arising from the built-in gains on the assets held by Double-D”; (2) the shareholders’ “sophisticated understanding of the structure of the entire transaction,” including Shap’s plans to immediately sell Double-D’s assets; and (3) the shareholders’ knowledge that Shap “had just come into existence for the purposes of the transaction” and thus “did not have the assets to meet its obligation to buy equivalent shares on the open market for 20 SALUS MUNDI FOUNDATION V. CIR delivery to Morgan Stanley or pay Morgan Stanley an equivalent sum in cash.” Id. at 187–89. We have held that “absent a strong reason to do so, we will not create a direct conflict with other circuits.” United States v. Chavez-Vernaza, 844 F.2d 1368, 1374 (9th Cir. 1987). “As a general rule, the tax decisions of other circuits should be followed unless they are demonstrably erroneous or there appear cogent reasons for rejecting them.” Beecher, 481 F.3d at 720. The Second Circuit’s decision in Diebold Foundation addressed the same facts, issues, and applicable law at issue in this appeal. While the question of the shareholders’ constructive knowledge is a difficult issue, we conclude that the Second Circuit’s decision is not demonstrably erroneous. Accordingly, we adopt the reasoning of that opinion on the state law inquiry and conclude that the shareholders had constructive knowledge of the tax avoidance scheme and made a fraudulent conveyance under New York law. See Diebold, 736 F.3d at 190; N.Y. Debt. & Cred. Law § 273. In short, we conclude that the two prongs of § 6901 are separate and independent; an alleged transferee’s substantive liability is determined solely with reference to state law, without any threshold requirement that the disputed transactions be recast under federal law. We also conclude that the shareholders’ conduct shows that they had constructive knowledge of the fraudulent scheme; we therefore collapse the series of transactions and hold that the state law liability prong of the 26 U.S.C. § 6901 inquiry was satisfied in this case. We remand to the Tax Court to determine in the first instance: (1) Salus Mundi’s status as a transferee of a transferee under the federal law inquiry of SALUS MUNDI FOUNDATION V. CIR 21 26 U.S.C. § 6901; and (2) whether the IRS assessed liability within the applicable limitations period.