In Uncategorized on 06/22/2015 at 17:54

Misquoting Scotland’s greatest, Judge Cohen decides that good faith, like love, has nothing to do with Sandra Shockley’s Section 6901 transference, in Sandra K. Shockley, Transferee, et al., 2015 T.C. Memo. 113, filed 6/22/15,  a “remand from the U.S. Court of Appeals for the Eleventh Circuit in Shockley v. Commissioner, 686 F.3d 1228 (11th Cir. 2012) (Shockley II), rev’g and remanding T.C. Memo. 2011-96 (Shockley I). The Court of Appeals in Shockley II reversed our decisions entered in accordance with Shockley I, in which we decided the period of limitations issue in favor of petitioners.” 2015 T. C. Memo. 113, at p. 2.

So Sandy and et als decide to go with the trial record from the original trial. Although Sandy lived in FL (which is how 11th Circuit got into the act), her company Shockley Holdings, was a WI LLC, so the Badger State’s version of the Uniform Fraudulent Transfer Act (WIUFTA) takes center stage, despite IRS’s attempt to deal with the definition of “transferee” first.

IRS is still looking to end-run State law, and failing. See my blogpost “The Rappers’ Tale,” 5/29/14.

Well, Judge Cohen finds that WI, though a trifle light on analysis, still comes up with the answer that good faith on the part of the transferee is nothing to the point.

WI wants to protect creditors from debtor razzmatazz, gives-and-goes, and sundry skullduggery.

“…any transfer must be viewed exclusively from the perspective of the creditor–the degree of knowledge or beliefs or good faith of the putative transferees regarding the nature of the transfer are not relevant to analysis. See Badger State Bank, 688 N.W.2d at 449 (“The transferee’s subjective state of mind does not play a role in resolving the present case under Wis. Stat. § 242.05(1).”). Thus, section 242.05(1) of the Wisconsin Statutes serves as a constructive fraud provision focusing on an objective result, meaning that there is no requirement that transferees be guilty of any fraud. Badger State Bank, 688 N.W.2d at 447.” 2015 T. C. Memo. 113, at p. 29.

But there has to be a transfer. Was there?

Well, this was one of the so-called Midco deals. These were the result of corporations with assets worth millions but with a basis of bupkis, whose stockholders want to unload but don’t want to pay tax (no capital gains at the corporate level). Enter the intermediary (like MidCoast; remember them?), who buys the stock in a shell-shill with a phony bank loan and sells the assets, pays off the loan, keeps a cut, and heads for the hills.

In this case, notwithstanding a plethora of shell-shills from every point of the compass and the Isle of Man, the whole romp through the Code goes down in three hours, under a barrage of lawyer-paper with no economic impact except tax savings.

In short, the corporation sold the assets and handed the cash to the stockholders via a series of handoffs worthy of John LeCarré.

Judge Cohen finds no economic substance and no business purpose (even though the latter might introduce concepts of good faith, Judge Cohen isn’t buying).

“Petitioners assert a few nontax business purposes for their having participated in the transaction, such as maximizing the return on their investment in [corporation] before retiring, avoiding the emotional difficulty involved in breaking up the company over time instead of all at once, and allegedly lacking any choice in the matter because the [corporation’s] board decided to pursue the stock sale. Again, petitioners’ purposes are immaterial because we are looking to the business purposes of the taxpayer. As the taxpayer is [corporation], the business purposes of the [corporation’s] board are determinative.” 2015 T. C. Memo. 113, at p. 45.

The issue is what happened to the corporation whose assets were stripped, and what economic benefits it might have obtained from the stripping. The transferees play no part in that.

And Judge Cohen leans over backwards to try to find a non-tax-driven business purpose, but comes up empty.

“Petitioners ascribe only one potential business purpose to the [corporation’s] board’s decision to enter into the transaction: its wanting to pursue a stock sale because of the greater return on investment to shareholders than that from an asset sale. The reason for the greater net after-tax proceeds from a stock sale, however, was essentially the avoided tax on the built-in gains of [corporation’s] appreciated assets. Thus, this business purpose is directly related to the tax-avoidance objective.

“Though not attributed to the [corporation’s] board, a possible business purpose could have been the effect on employee morale from the piecemeal selling of [corporation] to several different buyers over time. Petitioners describe a legitimate business concern of the impact on employee retention and possible decrease in productivity under these circumstances.

“If the [corporation’s] board was concerned about the ‘breaking up’ of [corporation], however, it nevertheless submitted to the overall transaction with the knowledge that this exact result would occur.” 2015 T. C. Memo. 113, at pp. 45-46.

Judge Cohen does concede that “While a business purpose may still be valid even if its desired result does not come to pass, in this instance the [corporation’s] board was not shown to have held this proposed purpose or to have made any attempt to achieve it.” 2015 T. C. Memo. 113, at p.46.

Anyway, consummation of this roundy-rounder required the corporation to be merged out of existence, so no “going concern” issues.

While there’s some jousting about when IRS’ claim accrued and therefore whether WIUFTA applies, Judge Cohen finds WIUFTA is broad enough to cover. The corporation owed tax the day it sold, not when it had to file its return.

And in exchange for its assets in the hundred-million range, it got Sandra’s and the et als’ worthless stock, and a seven-figure tax liability, plus additions, interest and penalties..

The Badger State loves creditors. The deal is a phony.

Sandra and the et als are transferees, gave nothing and got millions, and the Badger State doesn’t requires creditors to chase nonexistent or shell-shill transferors before nailing deep-pocket transferees.

My colleague Joel E. Miller, Esq., has an article soon to be published on the subject of Midco deals. It features “somber reasoning and copious citation of precedent.”

I, who am no scholar (and I can hear my readers saying, “and you can say that again, and a third time in Welsh”), have a simple takeaway.

Stockholder in corporation with assets in eight figures and basis of zippo, don’t be greedy. Remember the advice of that old Texas lawyer, Robert Thomas, Esq.: “pigs git fat, and hogs git et.” See my blogpost “Cullifer’s Travails,” 10/8/14.

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