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Stuart v. Commissioner of Internal Revenue

United States Court of Appeals, Eighth Circuit

November 14, 2016

William Scott Stuart, Jr., Transferee Appellee
v.
Commissioner of Internal Revenue Appellant Arnold John Walters, Jr., Transferee Appellee
v.
Commissioner of Internal Revenue Appellant Estate of James Stuart Jr., Deceased, Wells Fargo Bank, N.A., Personal Representative, Transferee Appellee
v.
Commissioner of Internal Revenue Appellant Robert Edwin Joyce, Transferee Appellee
v.
Commissioner of Internal Revenue Appellant

          Submitted: September 20, 2016

         Appeals from United States Tax Court

          Before RILEY, Chief Judge, MURPHY and SMITH, Circuit Judges.

          MURPHY, Circuit Judge.

         William Scott Stuart, Jr., Arnold John Walters, Jr., the Estate of James Stuart Jr., and Robert Edwin Joyce (collectively, former shareholders) owned stock in Little Salt Development Company (Little Salt) until 2003. After Little Salt failed to pay its 2003 taxes, the Commissioner of Internal Revenue (IRS) issued notices of transferee liability to the former shareholders. The United States Tax Court concluded that the former shareholders are liable for a portion of Little Salt's tax deficiency. The IRS appeals, and we vacate and remand.

         I.

         Little Salt is a corporation organized under the laws of the state of Nebraska. For many years Little Salt's primary asset was 160 acres of saline wetland on the outskirts of Lincoln, Nebraska, which Little Salt shareholders used for duck hunting. In 2003 Little Salt sold its land to the city of Lincoln for $472, 000. Following the land sale, Little Salt's only significant asset was cash.

         While Little Salt was exploring the possibility of selling its land, it received a letter from MidCoast Investments, Inc. (MidCoast). MidCoast offered to purchase Little Salt's stock after the land sale went through for a price equal to all of the cash held by Little Salt, less 64.92% of Little Salt's combined federal and state tax liability for 2003. In other words, the purchase price offered by MidCoast for Little Salt's stock exceeded the amount of money the shareholders would have received if they had liquidated the company and paid the taxes owed for that tax year. Little Salt shareholders accepted MidCoast's offer.

         On August 7, 2003 Little Salt followed through on the agreement by wiring $467, 721 in cash to a trust account maintained by counsel for MidCoast. MidCoast in turn wired the $358, 826 purchase price for the shareholders' stock to their counsel's trust account. Counsel for the shareholders then distributed the purchase price to the shareholders pro rata.

         MidCoast subsequently wired the $467, 721 it had received in the transaction to an account held in the name of Little Salt at SunTrust Bank, and on the next day $467, 000 was transferred from that account to another at the same bank which was entitled "MidCoast Credit Corp. Accounts Payable." Little Salt recorded this transfer as a shareholder loan.

         In December 2003 Little Salt filed a corporate tax return that reported taxable income in the amount of $432, 148 and tax due in the amount of $148, 456. This 2003 return also noted that Little Salt had $278 in cash, an outstanding shareholder loan of $467, 000, and no other assets. Little Salt did not include a payment with its return. Then, in 2004 MidCoast sold all of Little Salt's shares to Wilder Capital Holdings, LLC. During that same year, Little Salt reported a bad debt deduction of $450, 370. That 2004 bad debt deduction created a net operating loss which Little Salt carried back to its 2003 tax return.

         In 2007 the IRS issued a statutory notice of deficiency with respect to Little Salt's 2003 tax return. In the notice, the IRS disallowed the bad debt deduction reported on Little Salt's 2004 tax return and the net operating loss carryback deduction on the 2003 tax return. As a result the IRS assessed taxes of $145, 923 against Little Salt as well as an accuracy related penalty of $58, 369. After unsuccessfully attempting to collect from Little Salt, the IRS issued notices of transferee liability to its former shareholders under 26 U.S.C. § 6901. The notices explained that the IRS was recasting the 2003 transactions between Little Salt and MidCoast as a liquidating distribution of Little Salt's cash to its shareholders in redemption of their shares, followed by a payment from the shareholders to MidCoast for facilitating the distribution. The shareholders petitioned the Tax Court for review of the notices.

         The Tax Court concluded that under the Nebraska Uniform Fraudulent Transfer Act (NUFTA), Neb. Rev. Stat. §§ 36-701 to 36-712, the shareholders were liable for part of Little Salt's 2003 tax debt. The Tax Court rejected the IRS attempt to recharacterize the stock sale as a liquidating distribution to the shareholders under federal law, concluding instead that the substantive liability of the shareholders was a matter of state law. The court did not determine whether the stock sale could have been recast as a liquidating distribution under Nebraska law, but decided instead that Little Salt's payment of $467, 721 to MidCoast had been a fraudulent transfer and that the shareholders were liable under NUFTA as its beneficiaries. The shareholders' liability for the fraudulent transfer was limited to $58, 842, which was the difference between the amount the shareholders received through the stock sale and the amount they would have received if they had instead liquidated Little Salt and paid its ...


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