Attorney-at-Law

SUBSTANCE MATTERS

In Uncategorized on 03/01/2012 at 16:48

But Innocence Helps Too

Such is the story of Norma L. Slone, Transferee, et al, 2012 T.C. Mem. 57, filed 3/1/12. This is the story of the Slone Family and their encounter with the infamous Midcoast Credit Corp. (see my blogpost “A Good Day for Taxpayers”, 3/15/11). Like the taxpayers in Griffin and Starnes (both cases cited in Slone), the transferees, pure in heart, walk away clean.

It’s the same old story. Daddy Jim Slone was a DJ-turned-station-owner, and built the family broadcasting empire, all concentrated in a C Corp. Daddy sells to a local mogul; as usual,  basis zero, gain astronomical. The sale is an asset sale, and the C Corp pays the first installment of tax. While the sale is pending, C Corp’s accountant gets a feeler from a Midcoast stooge. The accountant does nothing until the closing is past. The C Corp makes no distribution of the sales proceeds post-closing.

Post-closing, the accountant and various lawyers check out the stooge, which is acknowledged to be a Mid-Coast entity, and, when the stooge appears legit, Norma and Daddy Jim agree to sell the stock of the C Corp to the stooge. The stooge has financing from Rabobank, and the deal closes, the stooge undertaking to assume the tax liability of the C Corp.

The rest is the usual story. The stooge does the mix-and-match with a phony tax loss to offset the gain, grabs the cash in the C Corp, and diddles around with IRS for as many years as it can get away with, finally collapsing under the weight of a $23 million deficiency.

Oh, did I mention the stooge never paid Penny One of the tax due?

IRS goes after Daddy Jim and Norma and their various trusts, as transferees. First Daddy Jim and Norma argue SOL, but that’s a nonstarter because of the stooge’s extensions of the SOL. Next Daddy Jim and Norma argue the stooge’s officer who signed the Form 872s extending the SOL had no authority, but Judge Haines finds “ostensible authority”, or what we called “apparent authority” in my young day, Far Above, etc.

First IRS claimed the deal was an “intermediary” transaction (a/k/a step transaction), but switched out of that theory because of the time lag between asset sale to local mogul and stock sale to stooge. Then IRS switches to substance over form: however the deal looked on paper, it was a sham, marrying a phony loss to a real gain. The stock “sale” was in fact a liquidating distribution from the C Corp, says IRS.

No, says Judge Haines: “We will respect the form of the transactions in this case. Respondent [IRS] has conceded that the asset sale was independent from the stock sale. The asset sale was negotiated by a media broker with Mr. Roberts providing accounting advice and Mr. Chandler legal advice. Mr. Roberts credibly testified that no tax strategies to offset the potential gain arising from the asset sale were discussed before the closing of the asset sale. The asset sale closed on July 2, 2001, more than five months before the closing of the stock sale. Slone Broadcasting’s [the C Corp] first installment of $3,100,000 of Federal income tax attributable to the asset sale was paid. There is no evidence that Fortrend, Midcoast, or Berlinetta [the three stooges] was involved in any way in the asset sale, nor is there any evidence that a sale of stock was anticipated at the time that the asset sale was negotiated and closed.” 2012 T. C. Mem. 57, at pp. 22-23.

Moreover: “Due diligence confirmed that Midcoast was a legitimate player in the debt collection industry and Fortrend and Midcoast had reputable law and accounting firms representing them. The purchaser of the stock, Berlinetta, was capable of closing by using funds provided by loans from Rabobank and other assets it owned. Berlinetta agreed that it would not use the assets of Slone Broadcasting for 10 days after the closing of the stock sale.” 2012 T.C. Mem. 57, at p. 23.

In fact, Daddy Jim, Norma and their advisers asked about Midcoast’s tax strategy, and got the brush-off from the Midcoast stooge. “Petitioners had no reason to believe that Fortrend’s methods were illegal or inappropriate. When Mr. Roberts and Mr. Phillips asked Fortrend for more information about how Berlinetta planned to offset the gains from the asset sale, they were told that Fortrend’s methods were ‘proprietary’. Petitioners did not have a duty to inquire further and are not responsible for any tax strategies Berlinetta used after the closing of the stock sale.” 2012 T.C. Mem. 57, at p. 24.

In a footnote, Judge Haines catalogs all the Midcoast cases, with the won-loss record, and it’s worth reading (2012 T. C. Mem. 57, footnote 9 at page 25).

Takeaway: Trust, verify–as far as reasonably possible. And don’t know too much.

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