UNITED STATES TAX COURT

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T.C. Memo. 2012-57

UNITED STATES TAX COURT

NORMA L. SLONE, TRANSFEREE, ET AL.,¹ Petitioners y.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 6629-10, 6630-10,

6631-10, 6632-10.

Filed March 1, 2012.

Stephen Edward Silver, David R. Jojola, and Jason M. Silver, for

petitioners.

John Wayne Duncan and Charles B. Burnett, for respondent.

¹Cases 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; and Slone

Revocable Trust, UA Dated September 20, 1994, Transferee, James C. Slone and

Norma L. Slone, Trustees, docket No. 6632-10.

SERVED MAR - 1 2012

-2MEMORA

UM FINDINGS OF FACT AND OPINION

HAINES, Judge: This case arises from petitions for judicial review filed in

response to notices of transferee liability issued to petitioners (transferee notices).

The issues for decision are: (1) whether the period of limitations for assessment

expired before the mailing of the transferee notices to petitioners; (2) whether the

substance over form doctrine applies to recast the transactions at issue; and (3) if

so, whether petitioners are liable as transferees under section 6901 for Arizona

Media Holding, Inc.'s (Arizona Media) unpaid Federal income tax liability for the

tax year ended June 30, 2002.2

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulations of

fact, together with the attached exhibits, are incorporated herein by this reference.

At the time petitioners filed their petitions, they resided in Arizona.

I.

The Slone Family and Slone Broadcasting Co.

Petitioner James C. Slone began his career m the radio industry in 1955. In

1963 Mr. Slone became à disc jockey at KHOS, a local radio station in Tucson,

2All section refererices are to the Internal Revenue Code, as amended, and

all Rule references are to the Tax Court Rules of Practice and Procedure.

Amounts are roundest to the nearest dollar. .

_3_

Arizona. Mr. Slone worked his way up to general manager of KHOS and served

in that position until 1971, when he was offered the opportunity to take over as the

manager of KCUB, another Tucson radio station. KCUB was owned and operated

by Rex Broadcasting Co. (Rex Broadcasting), an Arizona corporation formed in

1968. Mr. Slone accepted the KCUB offer. As part of his agreement with KCUB,

Mr. Slone became a partial owner of Rex Broadcasting.

Over time, Mr. Slone and his wife, petitioner Norma L. Slone, acquired all

the outstanding shares of Rex Broadcasting. In 1998, Mr. Slone changed Rex

Broadcasting's name to Slone Broadcasting Co. (Slone Broadcasting). In 2001

and 2002 Slone Broadcasting was a C corporation with a tax year ending June 30.

Slone Broadcasting was a family-run business, operating several radio

stations in Tucson. In 2000 and 2001 Mr. Slone was Slone Broadcasting's

president; his son James was its general manager, vice president and secretary; his

son Fred was its national sales manager; and his daughter Mary was its treasurer as

well as an on-air personality. Mrs. Slone did not work for Slone Broadcasting.

In 2001 Slone Broadcasting had two shareholders: (1) the Slone Revocable

Trust, which owned 114,956 shares of class A voting stock and 951,834 shares of

class B nonvoting stock; and (2) the Slone Family GST Trust (Slone GST Trust),

which owned 82,770 shares of class B nonvoting stock. Both trusts were formed

pursuant to the laws of Arizona. Mr. and Mrs. Slone were the trustees of the

revocable trust and the frantors of the Slone GST Trust, an irrevocable trust.

John Barkley was the sole trustee of the Slone GST Trust from its inception

in 1998 throughout the time of the transactions at issue. He is a licensed fiduciary

in the State of Anzona and is authorized to serve in various capacities, including

personal representative, conservator and trustee. He hires accountants, lawyers,

stockbrokers, and other professionals to aid him in carrying out his duties which

are defined, in this case, by the documents that established the Slone GST Trust.

He exercises his authority independently from Mr. and Mrs. Slone.

II.

The Asset Sale

In 2000, after consulting with his family, Mr. Slone decided to sell the Slone

Broadcasting business. He believed that a small family-run business faced

difficult challenges comÕeting against larger companies. One of those larger

companies was Citadel Broadcasting Co. (Citadel) owned by Larry Wilson. Mr.

Wilson had previously shown an interest in buying Slone Broadcasting's radio

stations and, when appro ched, indicated a continued interest in the acquisition.

The ensuing negotiations with Citadel were handled by a media broker

consultant hired by Sloati Broadcasting. Mr. Slone's accountant, D. Jack Roberts,

a certified public accountant with over 30 years of experience, advised on the

-5accounting aspects of the transaction, and Tom Chandler, Slone Broadcasting's

attorney, advised on the legal aspects of the transaction. None of the advisers

proposed tax strategies to reduce the Federal and State income taxes resulting from

the sale.

On December 21, 2000, Slone Broadcasting entered into an asset sale

agreement with Citadel (the asset sale). The asset sale closed six months later on

July 2, 2001. The purchase price was $45 million for all the assets of the radio

stations owned and operated by Slone Broadcasting. Slone Broadcasting's

adjusted basis in the assets sold totaled $6,401,074, resulting in a gain from the

sale of $38,598,926 and an estimated combined Federal and State income tax

liability of approximately $15,314,000.

The sale documents excluded the name "Slone Broadcasting" from the

assets sold. Slone Broadcasting and Mr. Slone were not prohibited from

reentering the media market by a noncompetition agreement. During negotiations

with Citadel, Mr. Slone wanted to withdraw one of the radio stations from the sale

so that he and his family could maintain a presence in the Tucson radio market.

Citadel would not agree to the change. Therefore, after the closing of the asset

-6sale, Slone Broadcasting did not conduct any business.3 There were no plans to

liquidate the corporatio at any time, nor were there any plans to make

distributions to its shareholders. In fact, no distributions were made. On October

15, 2001, Sloan Broadedsting made its first estimated Federal income tax payment

of $3,100,000 to the Internal Revenue Service (IRS) for its tax year ended June 30,

2002.

III.

The Stock Sale

Helen Johnson, a epresentative of Fortrend International, LLC (Fortrend),

sent an unsolicited letter and brochure to Mr. Roberts on June 29, 2001. Ms.

Johnson's letter described Fortrend as a "private investment/merchant-banking

group" seeking opportudities to acquire corporations in situations where the

"assets of the Target Corporation can be profitably sold and/or leased to one or

more purchasers/lessees." The letter also stated that Fortrend was able to

"structure transactions il at help manage or resolve liabilities at the corporate

level." Mr. Roberts did ot review the letter and company brochure until after the

closing of the asset sale.

3The Slone family id not conduct any business in the radio industry again

until 2006, when Mr. and Mrs. Slone purchased KEVT, a Tuscon radio station,

through a related limited liability company.

-7On August 8, 2001, Ms. Johnson sent Mr. Roberts a second letter

expressing Fortrend's continued interest in purchasing Slone Broadcasting's stock.

It described Fortrend's relationship with Midcoast Credit Corp. (Midcoast), a

corporation engaged in the business of collecting delinquent credit card debt

acquired from banks. After receiving the second letter, Mr. Roberts informed Mr.

Slone, in general, about Fortrend and Midcoast and the proposal to buy Sloan

Broadcasting's stock. Mr. Slone gave Mr. Roberts permission to investigate

further and to proceed if the transaction looked viable.

On September 7, 2001, Ms. Johnson sent a third letter to Mr. Roberts,

attaching the Fortrend/MidCoast business plan together with financial projections.

The plan described a typical stock sale and subsequent business model as follows:

042 An acquisition company ("AC") purchases stock of target corporation

(the "Company") that is a C corporation;

042 The Company has sold some or all of its assets;

042 The Company engages MidCoast to re-engineer its operations into the

asset recovery business, i.e. purchasing and collecting receivables;

042 A significant portion of the proceeds received from the asset sale

remains in the Company and is used by the Company to re-engineer

its operations into the asset recovery business;

042 The Company will reinvest the cash flows into additional purchases

of receivables;

-8042 The Company will sign a management contract with MidCoast for

MidCoast t perform services for the Company.

Mr. Roberts hired Steven Phillips, a local tax attorney, as counsel to advise

Mr. and Mrs. Slone and the Slone Revocable Trust on any Fortrend proposals.

Mr. Phillips was not invplved in and did not provide any legal advice with respect

to the asset sale. On Se tember 10, 2001, Mr. Phillips met with Mr. Slone to

discuss the proposed transaction. This meeting was Mr. Slone's only contact with

Mr. Phillips. Mr. Roberts represented Mr. Slone in all other communications with

Mr. Phillips.

Mr. Roberts provihed the Fortrend/MidCoast business plan to Mr. Phillips

for review. Mr. Phillips contacted a broker in the asset recovery business to

inquire about MidCoast'h reputation. The broker informed Mr. Phillips that

MidCoast played an active role in the asset recovery industry and had a reputation

as an aggressive collector, but a legitimate one. Mr. Phillips reviewed the

projections in the Fortrend/MidCoast business plan and concluded that they were

reasonable. The reputations of Fortrend and Midcoast together with those of their

attorneys and accountant advisers were good. There was no reason for Mr.

Roberts or Mr. Phillips td suspect any impropriety.

_9_

On October 24, 2001, Fortrend sent Mr. Roberts a letter of intent to

purchase Slone Broadcasting's stock through an affiliate, Berlinetta, Inc.

(Berlinetta). Berlinetta's sole shareholder was Willow Investment Trust (Willow),

a Fortrend entity. The letter of intent proposed a purchase price of $29,800,000

plus the assumption of Sloan Broadcasting's Federal and State income taxes owed

as of the closing date. Slone Broadcasting's balance sheet showed:

Assets:

Cash and cash equivalents

Due from related parties

Income tax refunds receivable

Prepaid income taxes

Total

$35,764,147

2,052,961

175,466

3,800,000

41,792,574

Liabilities and stockholder's equity:

Income taxes payable

Stockholder's equity

Class A voting common stock

Class B nonvoting common stock

Total

$15,004,269

114,956

26,673,349

41,792,574

Mr. Roberts and Mr. Phillips knew that Fortrend had a strategy to reduce the

income tax due as a result of the asset sale. When they asked Fortrend what

actions Berlinetta would take to achieve the tax savings, they were told that

Fortrend's methods could not be disclosed because they were "proprietary".

- 10 However, Fortrend représented that Berlinetta had not engaged in any transaction

that would be deemed a "listed transaction" pursuant to Notice 2001-51, 2001-2

C.B. 190. Mr. Phillips negotiated an increase in the purchase price for the stock

based.upon what he deséribed as a "premium" payment resulting from the tax

-

savings anticipated by erlinetta. When negotiations concluded, the parties

agreed to a purchase price of $35,753,000 plus Berlinetta's assumption of Sloan

Broadcasting's Federal nd State income taxes owed as of the closing date.

t

As trustee of the Slone GST Trust, Mr. Barkley hired Greg Gadarian,

another local tax. attorney independent from Mr. Phillips, to advise the Slone GST

Trust with respect to an Fortrend proposals. On November 21, 2001, Mr. Phillips

wrote a memorandum describing the transaction to Mr. Gadarian, providing a legal

analysis of the transferee liability considerations facing Slone Broadcasting's

shareholders, and concluding that they would not be exposed to such liability. Mr.

Gadarian reviewed Mr. Phillips' memorandum and performed his own research.

Mr. Gadarian agreed with Mr. Phillips' conclusions. Mr. Gadarian had no reason

to think that Fortrend planned to use an illegitimate scheme to offset the gains

from the asset sale. He tl erefore orally advised Mr. Barkley that there were no

material legal obstacles to the proposed transaction. Soon after, Mr. Barkley

approved the transaction hn behalf of the Slone GST Trust. Both Mr. Phillips and

- 11 Mr. Gadarian were aware of Notice 2001-16, 2001-1 C.B. 730, and both

concluded that it did not apply. On December 3, 2001, Mr. Phillips informed Mr.

Roberts that there were no legal obstacles to proceeding. Mr. Roberts advised Mr.

Slone that both Mr. Phillips and Mr. Gadarian had analyzed the legal implications

of the transaction and concluded that it could proceed.

On December 10, 2001, Slone Broadcasting entered into the stock sale

agreement with Berlinetta (stock sale). Berlinetta financed the acquisition of the

stock through a combination of loans and equity. Utrecht-America Finance Co.,

the U.S. branch of Cooperative Centrale Raiffeisen-Boerenleenbank B.A.

(Rabobank), lent Berlinetta $30 million, to be paid back no later than December

30, 2001. Slone Broadcasting had no involvement in the financing. The stock

sale agreement placed a restriction on the use of funds held in Slone

Broadcasting's bank account until 10 days after the closing date. Berlinetta also

held at least $18,459,360 of equity at the time of closing.

At the closing the Slone Revocable Trust and Slone GST Trust received

$30,819,544 and $2,550,456 in cash, respectively. Mr. Slone and his children

resigned as the officers and directors of Slone Broadcasting. Slone Broadcasting

did not make any distributions to its shareholders between the closing date of the

asset sale and the closing date of the stock sale.

- 12 On their joint Form 1040, U.S. Individual Income Tax Return, Mr. and Mrs.

Sldne reported a basis in their Slone Broadcasting stock of $106,679, resulting in a

reported gain from the stock sale of $32,765,826.4 The Slone GST Trust filed a

Form 1041, U.S. Incomè Tax Return for Estates and Trusts, for 2001, reporting a

basis of $8,277 in its Slöne Broadcasting stock and a gain from the stock sale of

$2,542,179. Because the Slone GST Trust was deemed a grantor trust, see secs.

671-678, its income and expenses, including the gain from the stock sale, were

reported on the 2001 joint Federal income tax return of its grantors, Mr. and Mrs.

Slone.

IV.

Arizona Media

Two days after th closing of the stock sale, on December 12, 2001, Slone

Broadcasting merged wiÈh Berlinetta, with Slone Broadcasting as the surviving

corporation. Because the name "Slone Broadcasting" was not part of the sale, on

January 17, 2002, Slone Broadcasting changed its name to Arizona Media.5

4For Federal inconie tax purposes, the Slone Revocable Trust is a

disregarded entity, and it did not file a Federal tax return.

5For simplicity, altliough the name change did not occur until January 17,

2002, we will refer to the surviving corporation as Arizona Media at all times after

the closing of the stock purchase agreement.

- 13 On December 13, 2001, Willow contributed Treasury bills to Arizona

Media with a purported basis of $38,148,304, and on January 7, 2002, Arizona

Media sold the Treasury bills for $108,731. On July 7, 2002, Arizona Media filed

its Federal tax return for its tax year ended June 30, 2002, reporting a $37,885,260

gain from the asset sale and an offsetting loss of $38,039,573 from the sale of the

Treasury bills. On August 6, 2002, the IRS refunded Arizona Media the

$3,100,000 estimated tax payment previously made by Slone Broadcasting.

. The IRS began its examination of Arizona Media in March 2005. The

president of Arizona Media at the time was Tim Conn, who was identified as the

corporation's president, secretary, and treasurer in its annual report filed with the

Arizona Corporation Commission. Arizona Media's bylaws prohibited the same

person from simultaneously serving as both president and treasurer of the

corporation.

On March 10, 2005, Arizona Media submitted to the IRS a Form 872,

Consent to Extend the Time to Assess Tax, for its tax year ending June 30, 2002,

signed by Mr. Conn, agreeing to extend the period of limitations for assessment to

December 31, 2006. On March 15, 2005, Arizona Media provided the IRS with a

Form 2848, Power of Attorney and Declaration of Representative, signed by Mr.

Conn, authorizing Arizona Media's attorney, Randall Dick, to execute further

- 14 extensions on Arizona Media's behalf. Over the next three years, Mr. Dick signed

additional Forms 872, aåreeing to extend the period of limitations for assessment

of Arizona Media for th¢ taxable year ended June 30, 2002. The final extension

was authorized on September 17, 2007, and extended the period of limitations for

assessment to Decembe 31, 2008. On April 14, 2008, Arizona Media submitted

Form 870-AD, Offer to Waive Restrictions on Assessment and Collection of Tax

Deficiency and to Accept Overassessment, to the IRS, accepting a deficiency in

income tax of $13,494,884 and a penalty pursuant to section 6662 of $2,698,997.

The IRS assessed the tax and the penalty on May 30, 2008, together with interest

of $7,277,395.

Arizona Media failed to pay the assessed tax, penalty, and interest. As a

result, on October 20, 20 8, the IRS placed Arizona Media's account on the

Federal Payment Levy P ogram. On December 5, 2008, the IRS issued a notice of

intent to levy; a due proc ss notice, and a levy notice (notice of levy) to Arizona

Media, and on Decembe 12, 2008, filed a notice of Federal tax lien for Arizona

Media's taxable year ended June 30, 2002. The IRS issued further notices of levy

to Arizona Media on February 10, August 4 and September 9, 2009. No moneys

were ever collected from Arizona Media. On August 28, 2009, Arizona Media

- 15 was administratively dissolved for failure to file its annual report with the State of

Arizona.

V.

Transferee Notice

On December 22, 2009, respondent issued transferee notices to the Slone

Revocable Trust and Slone GST Trust, determining that the trusts were liable for

$16,193,881 and $2,550,832, respectively, plus interest, as transferees of assets for

the unpaid liability of Arizona Media for the tax year ended June 30, 2002.

Additionally, respondent issued separate transferee notices to Mr. and Mrs. Slone

individually, determining each liable under a transferee theory for $16,193,881,

plus interest, for the unpaid liability of Arizona Media. Petitioners timely filed

their petitions.

OPINION

I.

Section 6901

Section 6901(a)(1) is a procedural statute authorizing the assessment of

transferee liability in the same manner and subject to the same provisions and

limitations as in the case of the taxes with respect to which the transferee liability

is incurred. Section 6901(a) does not independently impose tax liability upon a

transferee but provides a procedure through which the Commissioner may collect

from a transferee unpaid taxes owed by the transferor of the assets if an

- 16 independent basis exists under applicable State law or State equity principles for

holding the transferee liable for the transferor's debts. Commissioner v. Stern,

357 U.S. 39, 42-47 (1958); Hagaman v. Commissioner, 100 T.C. 180, 183 (1993);

Starnes v. Commissioner, T.C. Memo. 2011-63. Thus, State law determines the

elements of liability, and section 6901 provides the remedy or procedure to be

employed by the Commissioner as the means of enforcing that liability. Ginsberg

v. Commissioner, 305 F.2d 664, 667 (2d Cir. 1962), aff'g 35 T.C. 1148 (1961).

Section 6902(a) and Rule 142(d) provide that the Commissioner has the burden of

proving the taxpayer's lihbility as a transferee but not of showing that the

transferor was liable for he tax.

II.

Period of Limitations

Petitioners argue that the deficiency and the penalty determined against

Arizona Media for the tax year ended June 30, 2002, were not timely assessed and,

therefore, respondent is t me barred by the period of limitations under section

6901 from assessing transferee liability against petitioners. Section 6501(a)

provides, generally, that the amount of any tax must be assessed within three years

of the.filing of a return. Thesperiod of limitations for assessment of a liability

against an initial transferee is one year after the expiration of the period of

limitations for assessment against the transferor. Sec. 6901(c)(1). For a transferee

- 17 of a transferee, section 6901(c)(2) provides that the period of limitations expires

one year after the expiration of the period of limitations for assessment against the

previous transferee, but not more than three years after the expiration of the period

of limitations against the initial transferor.

Section 6501(c)(4) allows for extension of the period of limitations for

assessment by agreement of the taxpayer and the Secretary. Arizona Media's

Federal income tax return was deemed filed on September 15, 2002, creating a

September 15, 2005, deadline for assessment pursuant to section 6501(a).6 On

March 10, 2005, Arizona Media submitted a Form 872 to the IRS, signed by Mr.

Conn as president, extending the period for assessment to December 31, 2006.

Further extensions were filed by Mr. Dick pursuant to a power of attorney, the last

of which extended the assessment period for tax year ended June 30, 2002, to

December 31, 2008. Respondent assessed the deficiency and penalty in this case

on May 30, 2008.

Respondent contends that because Arizona Media agreed to extend its

period of limitations for assessment to December 31, 2008, the period of

6Arizona Media filed its Federal tax return for its tax year ended June 30,

2002, on July 7, 2002. Nonetheless, a return is considered filed on the last day

prescribed for filing if it is filed before that day. Sec. 6501(b)(1). September 15,

2002, was the last day prescribed for Arizona Media to file. See sec. 6072(b).

- 18 limitations for assessment against an initial transferee of Arizona Media was

extended to.December 31, 2009. S_e_e sec. 6901(c)(1). The transferee notices were

sent to petitioners on December 22, 2009.

Petitioners argue that Arizona Media's extension consents were not signed

by authorized officers b Arizona Media and, therefore, were invalid. More

specifically, petitioners argue that Mr. Conn did not have the authority to sign the

original Form.872, extending the period of limitations for Arizona Media to

December 31, 2006, and did4not have the authority to sign the power of attorney

granting Mr. Dick the right to.authorize,subsequent extensions. As a result,

petitioners argue that the transferee notices were issued outside the period of

limitations.

Section 6062 provides that corporate returns may be signed by "the

president, vice-president treasurer, assistant treasurer, chief accounting officer or

any other officer duly authorized so to act." Rev. Rul. 83-41, 1983-1 C.B. 349,

provides that the IRS wil generally apply the sante rules to a consent to extend the

period of limitations.

en Mr. Conn signed the original Form 872 and the power

of attorney granting Mr. Dick the authority to sign future extensions, he served as

both the president and th treasurer of Arizona Media. Petitioners argue that

because Arizona Media's bylaws prohibit the same person from simultaneously

- 19 holding both positions, Mr. Conn was neither the president nor the treasurer of

Arizona Media and had no authority to sign the documents at issue.

Petitioners rely on Arizona law to support this argument. Ariz. Rev. Stat.

Ann. (A.R.S.) sec. 10-840 (2004) provides that the board of directors of a

corporation shall appoint officers in accordance with its bylaws. A.R.S. sec. 10- .

841 (2004) also provides that each officer of an Arizona corporation must perform

his or her duties in accordance with the bylaws.

Petitioners' argument is not persuasive. We do not need to determine

whether Mr. Conn had actual authority to sign the documents at issue because

even if he did not, he had ostensible authority. Under Arizona law, ostensible

authority is that authority which exists where the principal knowingly or

negligently holds his agent out as possessing it, or permits him to assume it, under

such circumstances as to estop the principal from denying its existence. Koven v.

Saberdyne Sys., Inc., 625 P.2d 907, 911 (Ariz. Ct. App. 1980). To establish

ostensible authority, the record must reflect not only that the alleged principal held

out another as his agent, but also that the person who relied upon the manifestation

was reasonably justified in doing so under the facts of the case. E at 912.

In Koven, the court held that an annual report submitted to the Arizona

Corporation Commission granted the listed vice president of the corporation the

- 20 ostensible authority to receive service of process. In the instant case, Arizona

Media's annual report fi ed with the Arizona Corporation Commission identified

Mr. Conn as the corporation's president, secretary, and treasurer. Similar to the

report in Koven, this filing gave Mr. Conn the ostensible authority to sign the

documents at issue on behalf of Arizona Media.

Section 1.6062-1(c), income Tax Regs., provides that an individual's

signature on a return, statement, or other document made by or for a corporation is

prima facie evidence that the individual is authorized to sign the return, statement,

or other document. Petitioners have not presented any facts suggesting that the

IRS had reason to suspect that Mr. Conn did not have the authority to sign the

documents at issue. Therefore, the IRS determination that Mr. Conn had the

authority to>sign the documents at issue was reasonably justified. The period of

limitations for assessme t with respect to Arizona Media was validly extended to

December 31, 2008, and the Ítransferee hotices were not time barred.

III.

Theory of the Case

Respondent's theo

of the case has changed from the pleadings to his

briefs. The transferee no ices state that the stock sale should not be respected for

Federal tax purposes bec use it is substantially similar to an "intermediary

transaction" tax shelter described in Notice 2001-16, supra. Under that notice,

- 21 respondent sought to collapse the asset sale and the stock sale to recharacterize the

transactions as an asset sale followed by a liquidating distribution. Respondent

abandoned this argument on brief and acknowledged that the asset sale was

independent from the stock sale. Respondent now argues the substance over form

doctrine to recast the stock sale alone as a liquidating distribution.7 Respondent

has further conceded that petitioners' transferee liability under section 6901 relies

on his underlying substance over form argument.8 Therefore, if we determine that

the stock sale must be respected for Federal tax purposes, respondent's concession

resolves the transferee liability issue in favor of petitioners.

IV.

Substance Over Form Doctrine

Courts use substance over form and its related judicial doctrines to

determine the true meaning of a transaction disguised by formalisms that exist

7Respondent also argued that the stock sale should be disregarded for

Federal tax purposes pursuant to the economic substance doctrine. Respondent

presented this argument for the first time at trial and on brief. We do not find this

argument to be timely, and, therefore, we will not consider its applicability. See,

er, Estate of Mandels v. Commissioner, 64 T.C. 61 (1975); Estate of Horvath v.

Commissioner, 59 T.C. 551, 556 (1973); Frentz v. Commissioner, 44 T.C. 485,

490-491 (1965), aff'd per order, 375 F.2d 662 (6th Cir. 1967) ("This Court has

held on numerous occasions that it will not consider issues which have not been

pleaded.").

8Respondent states that his transferee liability theory is "predicated" on the

underlying substance over form argument. Pretrial Mem. 19; Opening Br. 64;

Reply Br. 82.

-22 solely to alter tax liabilities. See United States v. R.F. Ball Constr. Co., 355 U.S.

587 (1958); Commissioner v. Court Holding Co., 324 U.S. 331 (1945); Stewart v.

Commissioner, 714 F.2d 977, 987-988 (9th. Cir. 1983), aff'g T.C. Memo. 1982209; Rose v. Commissioner, T.C. Memo. 1973-207. In such instances, the

substance of a transaction, rather than its form, will be given effect. We generally

respect the form of a tradsaction, however, and will apply the substance over form

principles only when warranted. See Gregory v. Helvering, 293 U.S. 465 (1935);

Blueberry Land Co. v. Commissioner, 361 F.2d 93, 100-101 (5th Cir. 1966), aff'g

42 T.C. 1137 (1964).

We will respect the fonn of the transactions in this case. Respondent has

conceded that the asset sale was independent from the stock sale. The asset sale

was negotiated by a med a broker with Mr. Roberts providing accounting advice

and Mr. Chandler legal advice. Mr. Roberts credibly testified that no tax

strategies to offset the potential gain arising from the asset sale were discussed

before the closing of the asset sale. The asset sale closed on July 2, 2001, more

than five months before the glosing of the stock sale. Slone Broadcasting's first

installment of $3,100,000 of Federal income tax attributable to the asset sale was

paid. There is no evidence that Fortrend, Midcoast, or Berlinetta was involved in

- 23 any way in the asset sale, nor is there any evidence that a sale of stock was

anticipated at the time that the asset sale was negotiated and closed.

With respect to the stock sale, Fortrend initiated contact with Sloan

Broadcasting after the closing of the asset sale. Mr. Roberts credibly testified that

a letter addressed to him from Fortrend dated June 29, 2001, was not reviewed

before the closing of the asset sale. Attorneys having no involvement in the asset

sale were retained to negotiate the stock sale: Mr. Phillips for Mr. and Mrs. Slone

and the Slone Revocable Trust, and Mr. Gadarian for the Slone GST Trust. Due

diligence confirmed that Midcoast was a legitimate player in the debt collection

industry and Fortrend and MidCoast had reputable law and accounting firms

representing them. The purchaser of the stock, Berlinetta, was capable of closing

by using funds provided by loans from Rabobank and other assets it owned.

Berlinetta agreed that it would not use the assets of Slone Broadcasting for 10

days after the closing of the stock sale.

Respondent contends that petitioners, through their representatives, knew

that Fortrend planned to offset the gain from the asset sale and that the offset was

the reason the stock sale made financial sense to Fortrend. In fact, in Mr. Phillips'

memo to Mr. Gadarian dated November 21, 2001, he explains Fortrend's plan to

offset the gains from the asset sale by contributing high basis/low value assets to

- 24 Berlinetta in a section 351 transaction and selling those assets at a loss before the

end of 2001. Responde t argues that this was enough information for petitioners

to know of Fortrend's illegitimate scheme. We disagree.

We have addressed this argument in Frank Sawyer Trust of May 1992 v.

Commissioner, T.C. Memo. 2011-298, another transferee liability case involving

Fortrend, where we stat d:

Had the * * * [taxpayër] known of Fortrend's illegitimate scheme to

fraudulently offse the tax liabilities of the corporations, then we would be

inclined to disregard the form of the stock sales in favor of respondent's

contentions. However, there are legitimate tax planning strategies to defer

or avoid paying taxes; so it was not unreasonable for the * * * [taxpayer] to

believe that Fortrend had a legitimate method of doing so.

Petitioners had no reason to believe that Fortrend's methods were illegal or

inappropriate. When M . RÂberts and Mr. Phillips asked Fortrend for more

information about how Berlinetta planned to offset the gains from the asset sale,

they were told that Fortrend's methods were "proprietary". Petitioners did not

have a duty to inquire fupher and are not responsible for any tax strategies

Berlinetta used after the closing of the stock sale.

- 25 Neither the substance over form doctrine nor any related doctrines apply to

recast the stock sale as a liquidating distribution. Therefore, we find that the stock

sale should be respected for Federal tax purposes.9

Respondent has conceded that his theory of transferee liability is predicated

on his underlying substance over form argument with respect to the stock sale.

Because we have determined that the stock sale must be respected for Federal tax

purposes, respondent's concession resolves the transferee liability issue in favor of

petitioners and we need not analyze that liability under State law.

The Court, in reaching its holdings, has considered all arguments made, and,

to the extent not mentioned, concludes that they are moot, irrelevant, or without

merit.

9This Court has decided a series of transferee liability cases stemming from

transactions involving Fortrend and/or MidCoast. See Frank Sawyer Trust of May

1992 v. Commissioner, T.C. Memo. 2011-298; Feldman v. Commissioner, T.C.

Memo. 2011-297; Starnes v. Commissioner, T.C. Memo. 2011-63; Griffin v.

Commissioner, T.C. Memo. 2011-61; LR Dev. Co., LLC v. Commissioner, T.C.

Memo. 2010-203. Of these cases, Feldman is the only case where we held against

the taxpayer. Feldman is factually distinguishable from the instant case. First, in

Feldman the taxpayer knew that MidCoast, as the stock purchaser, had no

intention of ever paying the tax liabilities. Second, the taxpayer did not conduct

the proper due diligence. And third, the financing for the stock purchase was a

sham. The unique facts of Feldman are not applicable to the instant case.

- 26 To reflect the foregoing,

Decisions will be entered for

petitioners.