With a Side of Interest

Judge Albert G (“Scholar Al”) Lauber serves up today’s plat du jour at the Tax Court cafeteria, but Norma L. Slone, Transferee, T. C. Memo. 2022-6, filed 2/7/22, may find it unappetizing. Norma and her entourage of trusts and relatives have been here before; see my blogposts “Substance Matters,” 3/1/12, “Spring Cleaning,” 5/11/16, “Substance Matters – Part Deux,” 6/13/16, and  “Separate Checks – Redux,” 5/11/20.

Well, Tax Court, having twice been pate-whanged by 9 Cir for claiming the Slone Rangers (sorry, guys, the devil made me do it) were innocents, now must reckon up the bill for the transferor’s transgressions. That means a Rule 155 beancount.

“The IRS has calculated these numbers to include a deficiency of $13,494,884, an accuracy-related penalty of $2,698,997, and interest of $8,559,729, for a total of $24,753,610. The Ninth Circuit remanded the cases ‘for entry of judgment in favor of the Commissioner.’” T. C. Memo. 2022-6, at p. 2. The Slone Rangers claim IRS is double-dipping; they agree on the $24 million tax-plus-interest. “But they disagree as to the extent to which petitioners are liable for this debt. Petitioners contend that they are not liable for the penalty or ‘pre-notice’ interest, that the IRS has ‘double counted’ the transfers, and that they are entitled to reductions for ‘equitable recoupment.’” Idem., as my expensive colleagues say.

A transfer made for no consideration, that serves to defeat, delay and hinder creditors, gives rights to creditors, even if they aren’t yet creditors, under the AZ Uniform Fraudulent Transfers Act. A deadbeat can’t lay off all their assets in advance, incur a liability, and then claim poverty. And fraudulent intent on the part of the transferee is irrelevant; if the transferor sells all he has and gives it all to the poor, but instead of taking up as ordered, and then incurs debts he can’t pay, the poor transferees, though innocent as doves, are still on the hook.

Section 6751(b) Boss Hossery is off the table, as the Slone Rangers waited until now to raise it. And the Slones’ C Corp conceded the chop while controlled by the MidCo; to reverse that would be an ambush. Moreover, the chop belongs to the Slones’ C Corp, and Section 7491(c) applies to individuals, not  corporations.

Now no one is liable as transferee for more than they got from the transferor, so Norma and spouse, and their GST, only have to pony up $13 million. But their big trust got $30 million, so that’s in the crosshairs.

“The Slone Trust received cash totaling $30,819,544, but Slone Broadcasting’s aggregate Federal tax liability was only $24,753,610. Because the Slone Trust received assets with a value that exceeded the transferor’s total tax liability (including pre-notice interest), the Slone Trust’s liability for interest is governed by Federal law, and the availability of interest under Arizona law is irrelevant. We thus hold that respondent is entitled to recover pre-notice interest as provided in sections 6601(a) and 6621.” T. C. Memo. 2022-6, at p. 11 (Citation omitted, but read it).

And Judge Scholar Al issues a winter weather advisory.

“Petitioners urge that the IRS is attempting to “double count” the transfers and “impose an aggregate transferee liability . . . that far exceeds” Slone Broadcasting’s debt. Petitioners argue that, for section 6901 purposes, the assets deemed received by the Slone Trust should be reduced to $4,794,752—viz., the assets it actually received ($30,819,544) minus the assets it transferred to Mr. and Mrs. Slone ($26,024,792). But petitioners cite no authority, and we know of none, for the proposition that a transferee may reduce its liability by distributing the transferred assets to other persons. Indeed, such a rule would incentivize transferees to make a blizzard of subsequent transfers, hoping to frustrate IRS collection efforts.” T. C. Memo. 2022-6 ,at p. 11.

Transferee liability is several, that is, one after another; each transferee is liable for the whole amount, but no more than what she/he/it/they got. No transferee can claim that IRS should first pursue someone else. And once IRS gets the $24 million, the Slone Rangers are off the hook for anything else.

The Slone Rangers seek equitable recoupment, claiming their original returns showed too great a sales price for the stock in Slone Broadcasting, if the sale to the MidCo is disregarded as a sham. But equitable recoupment only helps if there’s no adequate remedy at law. But there is. Section 1341 claim-of-right.

“Section 1341 is captioned ‘Computation of Tax Where Taxpayer Restores Substantial Amount Held Under Claim of Right.’ It applies where (1) “an item was included in gross income for a prior taxable year . . . because it appeared that the taxpayer had an unrestricted right to such item,” and (2) a deduction is allowable in a later year ‘because it was established after the close of such prior taxable year . . . that the taxpayer did not have an unrestricted right to such item or to a portion of such item.’ § 1341(a)(1) and (2). If these conditions are met, and if  the deduction exceeds $3,000, the taxpayer’s tax for the later year is reduced by taking account of this deduction. See § 1341(a)(3), (4), and (5).” T. C. Memo. 2022-6, at pp. 13-14.

Except.

“Petitioners do not now have an existing claim under section 1341. That section applies only if ‘a deduction is allowable’ for the later year. § 1341(a)(2). Petitioners are cash basis taxpayers, and no deduction will be allowable on account of their transferee liability until they have paid the tax. See Estate of Stein, 37 T.C. at 957 (stating that relief is available ‘in the year of repayment’). We accordingly conclude that neither the doctrine of equitable recoupment nor petitioners’ section 1341 claim is properly before us in these cases. After paying the tax, petitioners may pursue these forms of relief by filing claims for refund and (if their claims are denied) by commencing suit in district court, see 28 U.S.C. § 1346(a) (2018), or the U.S. Court of Federal Claims, see id. § 1491(a).” T. C. Memo. 2022-6, at pp.14-15. (Footnote omitted, but it says if the Slone Rangers lose the Section 1341, they can try equitable recoupment again.).