James C. Slone, Transferee ( 2022 )

United States Tax Court
T.C. Memo. 2022-6NORMA L. SLONE, TRANSFEREE, ET AL.,
Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent 1
—————
Docket Nos. 6629-10, 6630-10, Filed February 7, 2022.
6631-10, 6632-10.
—————
David R. Jojola, Stephen Edward Silver, and Derek W. Kaczmarek,
for petitioners.
Arthur T. Catterall, Rachael J. Zepeda, William G. Bissell, Rick V.
Hosler, and Doreen Marie Susi, for respondent.
SUPPLEMENTAL MEMORANDUM OPINION
LAUBER, Judge: These cases involve the assertion by the
Internal Revenue Service (IRS or respondent) of transferee liability
against petitioners as transferees of a corporation that was stripped of
its assets and left unable to satisfy its Federal tax obligations. In
Slone III this Court ruled that petitioners were not transferees under
1 This opinion supplements our previously filed opinion Slone v. Commissioner
(Slone III), T.C. Memo. 2016-115, 111 T.C.M. (CCH) 1556, supplementing Slone v.
Commissioner (Slone I), T.C. Memo. 2012-57, rev’d and remanded, Slone v.
Commissioner (Slone II), 810 F.3d 599 (9th Cir. 2015), rev’d and remanded, Slone v.
Commissioner (Slone IV), 896 F.3d 1083 (9th Cir. 2018). Cases of the following
petitioners are consolidated herewith: Slone Family GST Trust, UA Dated August 6,
1998, Transferee, D. Jack Roberts, Trustee, docket No. 6630-10; James C. Slone,
Transferee, docket No. 6631-10; Slone Revocable Trust, UA Dated September 20, 1994,
Transferee, James C. Slone and Norma L. Slone, Trustees, docket No. 6632-10.
Served 02/07/22
2
[*2] the Arizona Uniform Fraudulent Transfer Act (Arizona UFTA) and
section 6901. 2 In July 2018, reversing our Court for the second time, the
U.S. Court of Appeals for the Ninth Circuit held that petitioners are
liable for the transferor corporation’s tax obligations. Slone IV, 896 F.3d
at 1088. 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.” Ibid.
We accordingly directed that decisions would be entered under Rule 155.
The parties have submitted dueling Rule 155 computations. They
agree that the transferor corporation’s total tax liability is $24,753,610.
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.” Finding
no merit in the arguments petitioners tender in support of their
computations, we will enter decisions as requested by respondent.
Background
These cases grow out of a stock-sale transaction commonly known
as an “intermediary company” or “Midco” transaction. Midco transac-
tions, a type of tax shelter, were widely promoted during the late 1990s
and early 2000s. Fortrend International, LLC (Fortrend), which en-
gineered the deal here, was a leading promoter of Midco transactions.
It has been involved in numerous cases previously considered by this
Court. 3 In Notice 2001-16, 2001-1 C.B. 730, clarified by Notice
2008-111, 2008-51 I.R.B. 1299, the IRS listed Midco transactions as “re-
portable transactions” for Federal income tax purposes.
2 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
3 See Tricarichi v. Commissioner (Tricarichi I), T.C. Memo. 2015-201, 110
T.C.M. (CCH) 370, supplemented by Tricarichi v. Commissioner (Tricarichi II),
T.C. Memo. 2016-132, 112 T.C.M. (CCH) 33, aff’d, Tricarichi v. Commissioner
(Tricarichi III), 752 F. App’x 455 (9th Cir. 2018), and Tricarichi v. Commissioner
(Tricarichi IV), 908 F.3d 588 (9th Cir. 2018); Salus Mundi Found. v. Commissioner,
T.C. Memo. 2012-61, rev’d and remanded, 776 F.3d 1010 (9th Cir. 2014), and vacated
and remanded sub nom. Diebold Found., Inc. v. Commissioner, 736 F.3d 172 (2d Cir.
2013); Frank Sawyer Tr. of May 1992 v. Commissioner, T.C. Memo. 2011-298, rev’d
and remanded, 712 F.3d 597 (1st Cir. 2013).
3
[*3] Although Midco tax shelters took various forms, they shared
several key features. These transactions were chiefly promoted to
shareholders of closely held C corporations that had large built-in gains.
The shareholders, while happy about the gains, were typically unhappy
about the tax consequences. They faced the prospect of paying two levels
of income tax on these gains: the usual corporate-level tax, followed by
a shareholder-level tax when the gains were distributed to them as
dividends or liquidating distributions. And this problem could not be
avoided by selling the shares. Any rational buyer would insist on a
discount to the purchase price equal to the built-in tax liability that he
would be acquiring. See Tricarichi I, 110 T.C.M. (CCH) at 371.
Promoters of Midco transactions offered a purported solution to
this problem. An “intermediary company” affiliated with the pro-
moter—typically a shell company, often organized offshore—would buy
the shares of the target company. The target’s cash would transit
through the Midco to the selling shareholders. After acquiring the
target’s embedded tax liability, the Midco would engage in a sham trans-
action purporting to offset the target’s realized gains and eliminate the
corporate-level tax. The promoter and the target’s shareholders would
agree to split the dollar value of the corporate tax thus avoided. The
promoter would keep as its fee a negotiated percentage of the avoided
corporate tax. The target’s shareholders would keep the balance of the
avoided corporate tax as a premium above the target’s true net asset
value (i.e., assets net of accrued tax liability).
In due course the IRS would audit the Midco, disallow the
fictional losses, and assess the corporate-level tax. But the Midco,
having distributed its cash to the selling shareholders, would typically
be asset-less and judgment-proof. The IRS would then be forced “to seek
payment from other parties involved in the transaction in order to
satisfy the tax liability the transaction was created to avoid.” Ibid.(quoting Diebold Found., Inc., 736 F.3d at 176).
The target company here was Slone Broadcasting Company
(Slone Broadcasting), a now-defunct Arizona corporation. It had two
shareholders: the Slone Revocable Trust (Slone Trust) and the Slone
Family GST Trust (GST Trust). James Slone and Norma Slone were the
trustees of the Slone Trust and the grantors of the GST Trust.
In 2001 Fortrend engineered a Midco transaction for petitioners.
Slone Broadcasting sold its assets to another broadcasting company for
$45 million, generating a taxable gain of $38,598,926 and a combined
4
[*4] Federal and state tax liability of about $15,314,000. See Slone I,
103 T.C.M. (CCH) at 1266. The trusts then agreed to sell their Slone
Broadcasting stock to a Fortrend affiliate (Berlinetta). At that point,
Slone Broadcasting had a net asset value (taking account of its accrued
tax liability) of less than $27 million. Id. at 1267. But Berlinetta agreed
to pay the trusts for their stock roughly $29.8 million, plus assumption
of all Federal and state tax liabilities. Ibid.; see Slone IV, 896 F.3d at
1084. Having no appreciable assets, Berlinetta for this purpose
borrowed $30 million from Rabobank, a Dutch bank that facilitated
many Midco transactions. See Slone I, 103 T.C.M. (CCH) at 1267; see
also Tricarichi I, 110 T.C.M. (CCH) at 375 n.5.
At the closing on December 10, 2001, the Slone Trust and the GST
Trust tendered their shares to Berlinetta and received cash totaling
$30,819,544 and $2,550,456, respectively. Slone I, 103 T.C.M. (CCH)
at 1268. The Slone Trust subsequently transferred $13,012,396 to Mr.
Slone and $13,012,396 to Mrs. Slone.
On their joint Federal income tax return for 2001, Mr. and Mrs.
Slone reported long-term capital gain of $32,765,826 from the stock sale.
Ibid. (The Slone Trust did not file a Federal income tax return.) The
GST Trust filed a Form 1041, U.S. Income Tax Return for Estates and
Trusts, reporting long-term capital gain of $2,542,179 from the stock
sale. The GST Trust was a grantor trust, see §§ 671–678, and this gain
was likewise reported on the joint return filed by Mr. and Mrs. Slone as
grantors, see Slone I, 103 T.C.M. (CCH) at 1268.
On December 12, 2001, two days after the stock sale closed, Slone
Broadcasting merged with Berlinetta and changed its name to Arizona
Media Holdings (AMH). Ibid. AMH used the proceeds of the asset sale
to pay off Berlinetta’s loan from Rabobank, leaving AMH a shell com-
pany with a large tax liability and essentially no assets. AMH engaged
in a sham transaction that purported to eliminate its tax liability. See
Slone IV, 896 F.3d at 1085; Slone I, 103 T.C.M. (CCH) at 1268. In July
2002 AMH filed a Form 1120, U.S. Corporation Income Tax Return, re-
porting a $37,885,260 gain from the asset sale and a loss of $38,039,573
from the sham transaction. Slone I, 103 T.C.M. (CCH) at 1268. 4
4 AMH filed this return on a fiscal year basis. Because the relevant transac-
tions and transfers occurred in 2001, for convenience we will refer to this return as
AMH’s 2001 return.
5
[*5] In March 2005 the IRS initiated an examination of AMH’s 2001
return. Following that examination AMH submitted a Form 870–AD,
Offer to Waive Restrictions on Assessment and Collection of Tax Defi-
ciency and to Accept Overassessment. AMH, as Slone Broadcasting’s
successor, thereby accepted for 2001 a Federal income tax deficiency of
$13,494,884 and an accuracy-related penalty of $2,698,997, for a total
liability of $16,193,881 (plus accrued interest).
In May 2008 the IRS assessed that liability plus accrued interest.
Having no meaningful assets, AMH made no payments toward this debt.
In August 2009 AMH was dissolved by the Arizona secretary of state for
failure to file its annual report.
Unable to collect the tax from AMH, the IRS initiated a transferee
liability examination of petitioners. On December 22, 2009, the IRS
issued Letters 902–T, Notice of Liability, to the Slone Trust and the GST
Trust, determining that they were liable, as transferees of Slone Broad-
casting, for $16,193,881 and $2,550,832, respectively, plus accrued
interest. See § 6901(a). The IRS issued separate notices of liability to
Mr. and Mrs. Slone, as transferees of the transferees, determining that
each was liable for $16,193,881, plus accrued interest. See § 6901(c)(2).
Petitioners timely petitioned this Court, all residing in Arizona at that
time.
Following the initial remand from the Ninth Circuit, this Court
examined the Arizona UFTA to determine whether petitioners were
liable as transferees. See Slone III, 111 T.C.M. (CCH) at 1558.
Petitioners contended that the form of the transaction—i.e., a stock sale
by the Trusts to Berlinetta—should be respected. Respondent
contended that the form of the transaction should be disregarded and
that it should be “treated as a liquidating distribution [from Slone
Broadcasting] for purposes of applying the [Arizona] UFTA.” Ibid.
This Court ruled that petitioners were not liable as transferees
on the theory that “petitioners and their advisers did not have actual or
constructive knowledge of Fortrend’s tax strategies” for evading
payment of Slone Broadcasting’s tax debt. Id. at 1559, 1560–61. The
Ninth Circuit again reversed, concluding that petitioners “were at the
very least on constructive notice that the entire scheme had no purpose
other than tax avoidance.” Slone IV, 896 F.3d at 1085. The Ninth
Circuit accordingly held that the transfer to petitioners was a “construc-
tively fraudulent transfer under the Arizona UFTA” and that petitioners
are thus “liable to the government for Slone Broadcasting’s federal tax
6
[*6] obligation as ‘transferees’ under 26 U.S.C. § 6901.” Id. at 1088. The
Ninth Circuit remanded the cases “for entry of judgment in favor of the
Commissioner.” Ibid.
In February 2019 we ordered the parties to file computations for
entry of decision under Rule 155. The parties submitted competing
computations and memoranda in support of their respective positions.
Discussion
A. Rule 155 Proceedings
In cases such as these, where the substantive issues have been
resolved (here by the Ninth Circuit), this Court normally directs that
decisions will be entered under Rule 155. See Vento v. Commissioner,
152 T.C. 1, 7 (2019), aff’d, 836 F. App’x 607 (9th Cir. 2021). Rule 155
provides that, “[w]here the Court has filed . . . its opinion . . . determining
the issues in a case, it may withhold entry of its decision for the purpose
of permitting the parties to submit computations . . . showing the correct
amount to be included in the decision.” Rule 155(a). “Rule 155
computations are designed to ascertain the bottom-line tax effect of the
determinations made in the Court’s opinion.” Vento, 152 T.C. at 7.
“If the parties’ computations are not in agreement, the Court has
discretion to afford them ‘an opportunity to be heard in argument
thereon.’” Id. at 7–8 (quoting Rule 155(b)). “Any argument under this
Rule will be confined strictly to consideration of the correct computation
of the amount to be included in the decision resulting from the findings
and conclusions made by the Court . . . .” Rule 155(c). “A party may not
use a Rule 155 computation to seek reconsideration of ‘the issues or
matters disposed of by the Court’s findings and conclusions.’” Vento, 152
T.C. at 8 (quoting Rule 155(c)). And “no argument will be heard upon or
consideration given . . . to any new issues.” Rule 155(c); see Vento, 152
T.C. at 9 (“The Court rigorously enforces the bar against raising new
issues in a Rule 155 proceeding.”).
B. Analysis
Section 6901 permits the Commissioner to assess a tax liability
against a person who is “the transferee of assets of a taxpayer who owes
income tax.” Salus Mundi Found., 776 F.3d at 1017. To impose this
liability, a court must determine whether “the party [is] substantively
liable for the transferor’s unpaid taxes under state law” and whether
that party is a “transferee” within the meaning of section 6901. Slone II,
7
[*7] 810 F.3d at 604 (quoting Salus Mundi Found., 776 F.3d at 1018).
The Ninth Circuit resolved both of these questions in respondent’s favor:
It held that the transfers to petitioners were “constructively fraudulent
transfer[s] under the Arizona UFTA” and that petitioners were “liable
to the government for Slone Broadcasting’s federal tax obligation as
‘transferees’ under 26 U.S.C. § 6901.” Slone IV, 896 F.3d at 1088.
Because petitioners are “transferees” under section 6901, they are
liable for Slone Broadcasting’s tax liability “up to the limit of the amount
transferred” to them. See Schussel v. Werfel, 758 F.3d 82, 93 (1st Cir.
2014), aff’g in part, rev’g in part, and remanding T.C. Memo. 2013-22.
The parties agree that Slone Broadcasting’s unpaid liability includes
(among other things) a deficiency of $13,494,884. Mr. and Mrs. Slone
each received $13,012,396, and the GST Trust received $2,550,456.
Because the deficiency by itself exceeds each of these amounts, the IRS’s
recovery against these three transferees is capped at the value of the
assets that each received.
However, the Slone Trust received $30,819,544, an amount that
exceeds Slone Broadcasting’s total liability of $24,753,610. Respondent
thus contends that the Slone Trust is liable for the transferor’s entire
liability, including the deficiency, the accuracy-related penalty of
$2,698,997, and pre-notice interest of $8,559,729. “Pre-notice interest”
consists of interest that accrued on the deficiency and penalty under
section 6601(a) between the due date of AMH’s 2001 tax return and the
date on which the notices of liability were mailed to petitioners.
Petitioners contend that the Slone Trust is liable only for the
deficiency and post-notice interest, i.e., interest that accrued after the
notices of liability were mailed to petitioners. They assert that the IRS
is improperly “double counting” the transfers, seeking to recover an
aggregate amount in excess of Slone Broadcasting’s tax liability. And
they contend that they are entitled to reductions for “equitable
recoupment.” We address these arguments in turn.
1. Liability for Penalty
Petitioners contend that the IRS is foreclosed from recovering any
portion of the penalty because “claim[s] for penalties against the
transferor . . . did not come into existence until long after the transfers
8
[*8] at issue.” For this proposition they rely on Stanko v. Commissioner,
209 F.3d 1082 (8th Cir. 2000), rev’g T.C. Memo. 1996-530.
In Stanko the U.S. Court of Appeals for the Eighth Circuit
interpreted Nebraska law in effect before 1989, when Nebraska adopted
the UFTA. See id. at 1084 n.1. The court reasoned that “penalties for
negligent or intentional misconduct by the transferor that occurred
many months after the transfer . . . are not . . . existing at the time of
the transfer.” Id. at 1088. The Eighth Circuit concluded that “[a]
creditor whose debt did not exist at the date of the . . . [transfer] cannot
have the conveyance declared fraudulent unless he pleads and proves
that the conveyance was made to defraud subsequent creditors whose
debts were in contemplation at the time.” Id. at 1087 (quoting U.S. Nat’l
Bank of Omaha v. Rupe, 296 N.W.2d 474, 476 (Neb. 1980)).
We ruled in Tricarichi I, 110 T.C.M. (CCH) at 385, that the Eighth
Circuit’s reasoning in Stanko does not apply to cases where liability
under state law is determined (as it is here) under the UFTA. In
Tricarichi I that question was governed by Ohio’s UFTA, which
“differ[ed] from the pre-UFTA Nebraska statute that the Eighth Circuit
was construing.” Ibid. As we explained, the Ohio UFTA “define[d]
‘claim’ expansively to include any ‘right to payment’ even if it is
‘unliquidated’ and ‘unmatured.’” Ibid. (quoting Ohio Rev. Code Ann.
§ 1336.01(C) (West 2003)). “The IRS may thus have a ‘claim’ for the
penalties whether or not they are thought to have been ‘existing at the
time of the transfer.’” Ibid. (quoting Stanko, 209 F.3d at 1088). We
noted that we had “reached the same conclusion concerning transferee
liability for penalties under the fraudulent transfer laws of other
States.” Ibid. (citing cases). The Ninth Circuit, to which appeal of the
instant cases would lie, affirmed our holding. Tricarichi III, 752
F. App’x 455.
Our analysis in Tricarichi fully applies here. Like the Ohio
UFTA, the Arizona UFTA defines “claim” as “a right to payment,
whether or not the right is reduced to judgment, liquidated, un-
liquidated, fixed, contingent, matured, unmatured, disputed, un-
disputed, legal, equitable, secured or unsecured.” Ariz. Rev. Stat. Ann.
§ 44-1001.2 (2021). The Supreme Court of Arizona has described this
definition as “unquestionably broadly worded,” ruling that it includes
“unknown and unasserted claims.” Hullett v. Cousin, 63 P.3d 1029, 1034
(Ariz. 2003). Thus, the Arizona UFTA supports transferee liability even
if the penalty were thought to be an “unknown and unasserted claim”
when the Slone Trust received the transfer.
9
[*9] The Arizona UFTA, moreover, does not require proof that a
transfer was made to defraud a specific existing creditor (such as the
IRS). Even if the IRS’s penalty claim were regarded as not being “in
existence” on the date of the transfer, the Slone Trust would have
transferee liability under section 44-1004(A)(2) of the Arizona UFTA.
Under that provision, liability to future (as well as present) creditors
exists if the transfer was made without the debtor’s receiving “a
reasonably equivalent value in exchange” and the debtor “intended to
incur, or believed or reasonably should have believed that he would
incur, debts beyond his ability to pay as they became due.” Ariz. Rev.
Stat. Ann. § 44-1004(A)(2)(b); see Slone IV, 896 F.3d at 1086–87 (finding
petitioners liable under Ariz. Rev. Stat. Ann. § 44-1004(A)(2));
cf. Tricarichi I, 110 T.C.M. (CCH) at 385 (holding to same effect under
Ohio UFTA). For these reasons, we reject petitioners’ argument that
their transferee liability excludes the accuracy-related penalty. 5
Finally, petitioners assert that they have no transferee liability
for the penalty because respondent failed to meet his burden of produc-
tion, which (they say) includes showing timely supervisory approval
under section 6751(b)(1). This argument fails for at least two reasons.
First, petitioners did not advance this argument at any point during the
trial or appellate proceedings. Quite the contrary: AMH executed a
Form 870–AD conceding liability for an accuracy-related penalty of
$2,698,997. Petitioners’ section 6751(b) argument is thus a “new issue”
that “may not be raised in the context of a Rule 155 computation.” Vento,
152 T.C. at 8.
Second, section 7491(c), which imposes a burden of production on
respondent in certain circumstances, applies only in cases involving “the
liability of any individual for any penalty.” (Emphasis added.); see
Dynamo Holdings Ltd. P’ship v. Commissioner, 150 T.C. 224, 230 (2018)
(“[T]he Commissioner does not bear the burden of production with
5 Petitioners err in relying on Frank Sawyer Trust of May 1992 v. Commis-
sioner, T.C. Memo. 2014-128, 107 T.C.M. (CCH) 1621, 1624, where this Court cited
Stanko in holding that a transferee was not liable for accuracy-related penalties
assessed against the transferors. The facts of the instant cases, which must be
evaluated under Arizona law, differ substantially from those of Frank Sawyer Trust,
which involved Massachusetts law. The U.S. Court of Appeals for the First Circuit
accepted our “factual finding that the Trust lacked knowledge—actual or
constructive—of the new shareholders’ tax avoidance intentions.” Frank Sawyer Tr.
of May 1992, 712 F.3d at 599. Here, by contrast, the Ninth Circuit has determined
that petitioners had at least constructive knowledge that Slone Broadcasting’s tax
liabilities would not be satisfied. Slone IV, 896 F.3d at 1087–88.
10
[*10] respect to penalties in a corporate or partnership-level
proceeding.”). These cases involve the tax liability of Slone
Broadcasting, a corporation. Although Mr. and Mrs. Slone are
individuals, the IRS has not determined any distinct penalties against
them, but rather has determined that they bear transferee liability for
Slone Broadcasting’s corporate tax debt.
2. Liability for Pre-Notice Interest
Petitioners next argue that they have no liability for pre-notice
interest, i.e., interest that accrued on the corporate tax liability through
December 22, 2009, when the IRS issued the notices of liability.
Petitioners contend that pre-notice interest “is not recoverable against
the transferees under Arizona state law.” We addressed and rejected
substantially the same argument in Tricarichi II.
As we explained in Tricarichi II, the law on this subject has been
elaborated in a long line of cases dating back many decades.
Tricarichi II, 112 T.C.M. (CCH) at 35 (citing Cappellini v.
Commissioner, 16 B.T.A. 802 (1929)). Where “the value of the assets
distributed to the transferee substantially exceed[s] the transferor’s
aggregate liability for deficiencies, penalties, and interest, the
transferee’s liability for interest is governed by, and must be computed
in accordance with, the Internal Revenue Code.” Ibid. (citing Lowy v.
Commissioner, 35 T.C. 393, 397 (1960)). On the other hand, if the
transferred assets are insufficient to satisfy the IRS’s claim against the
transferor, the IRS may have a further right to collect pre-notice interest
from the transferee, based on the transferee’s wrongful use of the
transferred assets. “Th[is] latter right is one that is founded on State
law, and it is only in such circumstances that it becomes appropriate to
investigate State law” to determine the IRS’s right to interest. Ibid.(quoting Lowy, 35 T.C. at 397).
In Tricarichi II we held that the IRS was entitled to recover pre-
notice interest from the transferee, at the rate specified in section 6621,
because the transferee “received assets with a value in excess of [the
transferor’s] total Federal tax liability (including pre-notice interest).”
Id. at 36. On appeal the Ninth Circuit affirmed that holding. It ruled
that, where the transferee receives assets with a value exceeding the
transferor’s liability, the “Internal Revenue Code determines pre-notice
interest, and the availability of interest under state law is irrelevant.”
Tricarichi IV, 908 F.3d at 593.
11
[*11] On this point the salient facts of these cases are the same as in
Tricarichi II. 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. See Tricarichi II, 112 T.C.M.
(CCH) at 36–37. 6
3. Alleged “Double Counting”
Petitioners urge that the IRS is attempting to “double count” the
transfers and “impose an aggregate transferee liability . . . that far ex-
ceeds” 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 transfer-
ees to make a blizzard of subsequent transfers, hoping to frustrate IRS
collection efforts.
“Transferee liability is several” under section 6901. Alexander v.
Commissioner, 61 T.C. 278, 295 (1973); Tricarichi I, 110 T.C.M. (CCH)
at 386. Petitioners are thus severally liable for Slone Broadcasting’s tax
debt (up to the value of the assets that each received). “[T]he fact that
more than one person is responsible for a particular delinquency does
not relieve another responsible person of her personal liability, nor can
a responsible person avoid collection against herself on the ground that
the Government should first collect the tax from someone else.” Woodley
v. Commissioner, T.C. Memo. 2017-242, 114 T.C.M. (CCH) 625, 628
(quoting USLIFE Title Ins. Co. of Dallas v. Harbison, 784 F.2d 1238,
6 Petitioners challenge transferee liability for the pre-notice interest, as for the
penalty, on the theory that “the claim for interest did not come into existence and begin
to accrue until nine months after the transfer.” But interest on a tax liability is not a
claim that is different or separate from the underlying tax debt. Interest accrues
automatically under Federal law, see § 6601(a), and it is simply part of the debt owed
by the transferor-taxpayer to the IRS, see Tricarichi IV, 980 F.3d at 592. As explained
in the text, the Internal Revenue Code, not Arizona law, determines the amount of the
IRS’s claim against the transferor.
12
[*12] 1243 (5th Cir. 1986)) (discussing joint and several liability under
section 6672).
Of course, “the tax liability of the transferor can be collected only
once.” Holmes v. Commissioner, 47 T.C. 622, 627 (1967). Thus, the IRS
may take no further collection action against any of the transferees once
Slone Broadcasting’s aggregate tax liability of $24,753,610 (plus post-
notice interest) has been satisfied in full. But petitioners cannot reduce
or eliminate the Slone Trust’s liability for pre-notice interest and the
accuracy-related penalty by insisting that the IRS must seek recovery
from Mr. and Mrs. Slone instead. See Morris v. Commissioner, T.C.
Memo. 2000-381, 80 T.C.M. (CCH) 886, 892. 7
4. Equitable Recoupment
Finally, petitioners urge that they are entitled to reduction of
their transferee liability under the doctrine of “equitable recoupment.”
This entitlement, they contend, arises as a consequence of the Ninth
Circuit’s recharacterization of their stock-sale transaction as a liqui-
dating distribution from Slone Broadcasting. Although petitioners may
have a valid point, their claim for equitable recoupment is not yet ripe.
Petitioners treated the December 2001 transaction as a sale of
stock to Berlinetta (the Fortrend affiliate), with Berlinetta assuming all
of Slone Broadcasting’s tax liabilities. Mr. and Mrs. Slone accordingly
reported, on their 2001 joint tax return, long-term capital gain of
$35,687,452. Virtually all of this gain, taxable at a 20% rate, was attri-
butable to the Midco transaction.
As it turned out, the sale price that the Slones reported on their
2001 return was artificially high. That price reflected the assumption
that Slone Broadcasting’s tax liabilities would be paid by Berlinetta (or
more likely, never be paid at all). That assumption, of course, was false.
The Ninth Circuit disregarded the form of the transaction and re-
characterized it as a liquidating distribution to petitioners, coupled with
transferee liability whereby Slone Broadcasting’s tax liabilities have
now been charged to them. Given this turn of events, petitioners con-
7 Respondent concedes that, once the transferor’s liability has been fully satis-
fied, “then, as a matter of law, all liability of the transferees would be extinguished.”
As respondent notes, however, “it is unknown at this point which of the petitioners will
choose to or be able to pay.” The IRS is thus entitled to maintain its claims for several
liability against all four transferees until Slone Broadcasting’s aggregate Federal tax
liability (plus post-notice interest) has been paid in full.
13
[*13] tend that the capital gain reported on their 2001 return was
exaggerated, creating the risk of inconsistent taxation.
To remedy this problem, the Slones have recomputed their 2001
tax liability by reducing their reported capital gain ($35,687,452) by the
transferee liability imposed on them ($24,753,610), yielding a revised
capital gain of $10,933,842. Making that substitution on their 2001
return, they calculate a “corrected” tax liability of $2,125,820, versus the
$7,078,352 actually reported. The difference between those amounts, or
$4,952,532, constitutes the amount of “equitable recoupment” to which
they think they are entitled. Allocating that sum among the four peti-
tioners, they contend that the transferee liability chargeable to them
should be reduced as follows: 8
Transferee Reduction
Mr. Slone $1,931,205
Mrs. Slone 1,931,205
Slone Trust 711,602
GST Trust 378,520
Total $4,952,532
Equitable recoupment is an equitable remedy designed to prevent
injustice “where the Government has taxed a single transaction, item,
or taxable event under two inconsistent theories.” United States v.
Dalm, 494 U.S. 596, 605 n.5 (1990). Respondent does not dispute that
this Court has jurisdiction to apply the doctrine. See § 6214(b). But the
“basic requirement for equitable relief has always been the inadequacy
of the remedy at law.” Estate of Stein v. Commissioner, 37 T.C. 945,
956–57 (1962). Section 1341 appears to provide a legal remedy for the
problem that petitioners have identified.
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
8 These allocations reflect the assumption, which we have rejected, that the
Slone Trust’s liability is reduced on account of its transfers to Mr. and Mrs. Slone. See
supra pp. 11–12.
14
[*14] 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).
We have repeatedly held that the remedy of equitable recoupment
is not available when section 1341 provides an adequate remedy at law:
[W]here a taxpayer has in [one] year received an amount
from a corporation under a claim of right and paid a tax
upon the receipt, he is not entitled to recover the tax paid
in the prior year under a doctrine of equitable recoupment
when it is later determined that he is liable as transferee
for tax of the corporation making the distribution to him.
Maynard Hosp., Inc. v. Commissioner, 54 T.C. 1675, 1676 (1970); see
Estate of Stein, 37 T.C. at 958 (“[E]quitable recoupment is unavailable
in cases to which section 1341 applies.”); Delpit v. Commissioner,
T.C. Memo. 1992-297, 63 T.C.M. (CCH) 3053, 3054–55 (same), supple-
menting T.C. Memo. 1994-147.
Section 1341 thus “provides the appropriate remedy” where a
transferee is “required to restore payments which he had received under
a claim of right.” Maynard Hosp., Inc., 54 T.C. at 1676; see Estate of
Stein, 37 T.C. at 957 (ruling that section 1341 provides “a remedy
superior to and inclusive of equitable recoupment”); Kardash v. Com-
missioner, T.C. Memo. 2015-197, 110 T.C.M. (CCH) 353, 356 (same),
supplementing T.C. Memo. 2015-51. A transferee must therefore pursue
a claim under section 1341 before seeking equitable recoupment.
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.
15
[*15] § 1346(a) (2018), or the U.S. Court of Federal Claims, see id.
§ 1491(a). 9
To implement the foregoing,
Decisions will be entered in accordance with respondent’s com-
putations.
9 If in a subsequent refund action petitioners are denied relief under section
1341, an equitable recoupment claim may then become available (so long as they meet
the relevant requirements). See Estate of Stein, 37 T.C. at 956 n.10 (stating that
“District Courts have permitted equitable recoupment” if section 1341 does not apply).