In Uncategorized on 11/17/2020 at 18:27

That’s Judge Mark V. Holmes to IRS, as he gives summary J to Carolyn E. Liao & George Liao, transferees, et al., 19035-13, filed 11/17/20; they’re not transferees, or even transferees of transferees, as the larcenous scheme of Charles Klink and Steven Block to outdo even MidCoast can’t satisfy the IA Uniform Fraudulent Transfer Act.

IRS couldn’t show that Charles’ and Steve’s shell-shill did a roundy-round with cash from Carolyn’s & George’s family corp, the PHC of Carolyn’s late Mom (basis zero, value immense). Carolyn & George and the als were facing a massive estate tax bill when Mom became the late Mom, with no cash. Charles and Steve offered an even bigger premium than MidCoast for the PHC’s shares, which led Carolyn & George and the als (plus their advisers) to think these deals were normal.

The shell-shill named in contract of sale never did nothing; Charles’ and Steve’s own corp got the money from somewhere, but never pledged any of the PHC’s assets, and there was no proof they borrowed anything. Post-purchase, Charles and Steve stripped the stock the PHC held, but left cash. This they stripped later, and tried a Rogers-style Brazilian bad debt dodge to bury the capital gain on both of the asset strips.

Of course, Charles and Steve weren’t novices. DOJ handed them a civil complaint, whereupon   “(A) few months after receiving the complaint, Klink and Block agreed in a stipulated injunction to knock it off.” Order, at p. 7.

The PHC didn’t liquidate for another year. And the PHC stock or the PHC’s assets weren’t pledged for the money to buy out Carolyn & George and the als. So though IRS may claim they’re Section 6901 transferees, they aren’t.


IRS wants substance-over-form, or economic substance, to show that what really happened was that the PHC liquidated, and the assets distributed to Carolyn & George and the als. So they owe the capital gains taxes Charles and Steve never paid.

Caroilyn & George and the als reside in five (count ’em, five) different States, which brings in 5 CCAs, but Mom’s estate is domiciled in IA. Unfortunately for IRS, IA’s Uniform Fraudulent Transfer Act at the time the deal went down didn’t have the WIUFTA provisions about transferee good faith not being a defense. Remember Sandy Shockley? No? See my blogpost “Gude Faith, He Maun’ Fa’ That,” 6/22/15.

Judge Holmes cruises through a bunch of CCA and Tax Court precedent. For economic substance, prongification seems to be the issue, whether single prong (overall result) or double prong (subjective nontax intention and objective balance-sheet moving).

“Regardless of what version of the doctrine a court uses, determining whether a transaction has economic substance requires a close examination of the facts. When the Commissioner tries to recharacterize a premium stock sale as a liquidating distribution, courts tend to focus on three facts in particular: when the assets were sold, where the purchase money came from, and what the sellers knew. For example, when the shareholders of a corporation that’s already sold all of its assets subsequently sell their stock, there’s effectively just a trade of cash for cash, which suggests that the stock sale lacks economic substance even though the legal relationship between the corporation and the shareholders technically changes. And when the money used to buy the stock is from a short-term loan that’s collateralized by or immediately paid back with the purchased corporation’s cash, it still looks like the corporation is using its own money to pay its shareholders. Courts might recharacterize that type of transaction even if the purchased corporation doesn’t technically dissolve until years later.” Order, at p. 13. (Citations omitted).

Judge Holmes finds no willful blindness on Carolyn’s & George’s and the als’ part. Even if Charles’ and Steve’s corp did borrow against the PHC’s assets in order to buy the stock, so does every home buyer who gets a mortgage for part of the purchase price, and every driver who hocks his car to borrow the money to buy it. It’s the immediate unloading of the assets to pay the loan and grab whatever’s left that is suspect. That didn’t happen here.

“There is no genuine dispute that petitioners here didn’t liquidate this company’s assets before the stock sale, the cash they accepted didn’t come from fishy financing, and they didn’t know that [Charles’ and Steve’s corp] was up to no good. We therefore hold that the sale of [PHC] had economic substance, and was really a sale and not a disguised liquidating distribution.” Order, at p. 15.

That leaves substance-over-form. But remember, IAFCA as then applicable didn’t have the UFCA provisions negating intent of the transferee. Maybe Charles’ and Steve’s deal was phony, but Carolyn & George and the als didn’t know that. And there’s no evidence that the proceeds of the asset strip were used to pay off any loans Charles and Steve may have taken to buy the PHC shares.

Carolyn & George and the als claim that IRS nailed Charles and Steve for phony sales, so IRS is estopped from claiming liquidation and distribution.

” The Commissioner’s position isn’t clearly inconsistent with what the Justice Department said about Klink and Block. The complaint alleges they ‘fraudulently effect[ed] the purchase of stock of closely-held companies . . . in order to evade the payment of corporate income taxes’ through transactions that “ha[d] no economic substance . . . [and were] sham transactions.’ It also specifically mentioned the economic substance doctrine and sought to apply substance-over-form principles.

“There’s another reason these positions aren’t inconsistent: They aren’t about the same thing. The Justice Department’s case against Klink and Block was about a years-long pattern of behavior, not the specific transaction at issue here. Petitioners say it’s enough that the facts of this transaction more or less fit that pattern. But they cite no authority suggesting that we can estop an argument about a specific transaction just because that argument is inconsistent with what was said about the general behaviors of different parties in a different suit. We see no reason why the Commissioner can’t argue that the transaction here was really a liquidating distribution.” Order, at p. 17.

But consistent or inconsistent, IRS loses. This was a real sale.

For any IA lawyers reading this, check out Order at pp. 18-24, as Judge Holmes goes through the interface between Federal tax law (when does tax liability accrue, whether or not contingent) and the IAUFTA.

IRS wants a reopener to put in a couple affidavits (oh partitive genitive, where is thy sting?) about a shell-shell that played no part in the deal, and doesn’t get it.

But Judge Holmes says the real problem is the CLE classic “lose your case at discovery.” Remember, IRS was fighting summary J.

“The parties here did not file a stipulation. To support their arguments, they rely on affidavits, documents attached to those affidavits, and the Commissioner’s answers to requests for admission. The record is therefore less complete–and less reliable–than it would be if the parties had questioned the other side’s witnesses, obtained experts’ reports, or agreed on what at least some of the facts were. We can therefore deny the motion if the Commissioner shows that he can’t make his case or show that there’s a genuine dispute of material fact without subpoenaing and examining witnesses.” Order, at p. 2 (Citations omitted).

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