On Monday the Ninth Circuit Court of Appeals issued an opinion in Slone v. Commissioner of Internal Revenue, No. 12-72464 (and related cases). At issue in Slone was whether shareholders of Slone Broadcasting could be held liable for the unpaid tax liabilities of Slone Broadcasting, including penalties and interest.
After the IRS was unable to collect the tax liabilities from Slone Broadcasting, it issued notices of liability to the former shareholders of Slone Broadcasting under the provisions of I.R.C. § 6901. Normally, a shareholder is not liable for the tax debts of a corporation. However, the IRS has a variety of tools with which to collect unpaid corporate tax liabilities from shareholders or other third parties. Some of these tools are based upon judicial constructs, such as nominee and alter ego theories. G.M. Leasing Corp. v. United States, 429 U.S. 338 (1977) (nominee theory); Wolfe v. United States, 798 F.2d 1241 (9th Cir. 1986) (alter ego theory).
Another tool available to the IRS is transferee liability. The IRS can pursue transferee liability under a few similar authorities: (1) by filing a transferee lien or serving a transferee levy pursuant to the Federal Debt Collection Procedures Act (28 U.S.C. §§ 3301-3308), (2) in California, by filing the transferee lien or serving the transferee levy pursuant to the California Uniform Fraudulent Transfer Act (Cal. Civ. Code §§ 3439-3449); or (3) by making a transferee assessment under the provisions of I.R.C. § 6901. At issue in Slone was the last of these remedies: the IRS issued notices of liability proposing transferee assessments against the former shareholders of Slone Broadcasting.
The former shareholders filed Tax Court petitions in response to the notices of liability, and the Tax Court held that the shareholders were not liable for Slone Broadcasting’s tax, penalties, and interest. The IRS appealed to the Ninth Circuit Court of Appeals.
The Ninth Circuit applied a two-prong inquiry known as the Stern Test from Comm’r v. Stern, 357 U.S. 39, 44-45 (1958). Under the Stern test, a court will first determine whether a proposed transferee is a “transferee” under I.R.C. § 6901 and federal tax law; and then the court will determine whether the party is substantively liable for the liability under state law. The Ninth Circuit looked to determine whether the underlying stock sale transaction at issue in Slone “had any practical economic effects other than the creation of income tax losses.” (Citing Reddam v. Comm’r, 755 F.3d 1051 (9th Cir. 2014), see our prior post here.)
The Ninth Circuit concluded that the Tax Court failed to apply the correct legal standard for characterizing the stock sale transaction for purposes of federal transferee liability in that it did not address the subjective or objective factors normally applied in characterizing a transaction for tax purposes. Ultimately the Ninth Circuit vacated the Tax Court’s judgment and remanded the case for further factual determinations as to whether the IRS could properly disregard the form of the transaction.