Ninth Circuit: Transferee liability, asset sale followed by stock sale

Ninth Circuit: Transferee liability, asset sale

The U.S. Court of Appeals for the Ninth Circuit today vacated and remanded a decision of the U.S. Tax Court in a case involving an assessment for transferee liability concerning an asset and stock sale.

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The case is: Slone v. Commissioner, No. 12-72464 (9th Cir. August 28, 2015). Read the Ninth Circuit’s decision [PDF 112 KB] that includes an opinion that concurs in part and dissents in part.

Summary

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 determined that the stock sale was a legitimate transaction and that the transaction must be respected.

The Ninth Circuit today held that the Tax Court 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. 

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