The U.S. Court of Appeals for the Ninth Circuit today reversed a decision of the U.S. Tax Court, and remanded with instructions to enter judgment for the IRS Commissioner. The case involved an assessment for transferee liability when there was an asset sale followed by a stock sale.
The case is: Slone v. Commissioner, No. 16-73349 (9th Cir. July 24, 2018). Read today’s Ninth Circuit’s decision [PDF 120 KB]
The taxpayer sold its assets to a second company, and then the taxpayer’s shareholders sold their shares to that same company which then changed its name and was later administratively dissolved for failure to file an annual report.
The IRS sent notices of tax liability to the taxpayer’s former shareholders, with the IRS claiming that the shareholders were liable as “transferees” for taxes owed on the taxpayer’s asset sale. The IRS asserted it could disregard the form of the stock sale because the substance of the transaction was that the taxpayer dissolved upon selling its assets, then distributed those assets to its shareholders through the stock sale.
The Tax Court initially determined that the stock sale was a legitimate transaction and that the transaction must be respected.
On appeal, the Ninth Circuit (in 2015) held that the Tax Court had applied an incorrect test in making its determination. The Ninth Circuit found that when the IRS claimed a taxpayer was “the shareholder of a dissolved corporation” for purposes of section 6901, but the taxpayer did not receive a liquidating distribution if the form of the transaction is respected, a court must consider the relevant subjective and objective factors to determine whether the formal transaction “had any practical economic effects other than the creation of income tax losses.” The Ninth Circuit remanded the case to the Tax Court, with instructions to apply the test set forth in Commissioner v. Stern, 357 U.S. 39 (1958).
Stern requires that a two-pronged test be satisfied for a tax liability to be imposed on a transferee under section 6901: (1) the first prong is satisfied if the party is a “transferee” under section 6901 and federal tax law; and (2) the second prong is satisfied if the party is “substantively liable for the transferor’s unpaid taxes under state law.”
On remand, the Tax Court in 2016 found that under applicate state law (Arizona which had enacted the Uniform Fraudulent Transfer Act (UFTA)), there was no actual fraud. Since the Tax Court found that under Stern, the state law prong had not been satisfied, it did not analyze the federal law prong of the test.
Today, the Ninth Circuit reversed. The Ninth Circuit found that in applying the UFTA, the transaction was “constructively fraudulent” as to the IRS because the taxpayer did not receive a reasonably equivalent value in exchange for the transfer to its shareholders and was left unable to satisfy its tax obligation. The appeals court further explained that the sale to the second company was a cash-for-cash exchange lacking “independent economic substance beyond tax avoidance” and that “reasonable actors … would have been on notice that the [second company] never intended to pay … [the taxpayer’s] tax obligation.”
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.KPMG International Cooperative (“KPMG International”) is a Swiss entity.
Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.