Submitted: September 20, 2016
from United States Tax Court
RILEY, Chief Judge, MURPHY and SMITH, Circuit Judges.
MURPHY, Circuit Judge.
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
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.
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.
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
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.
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.
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
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 ...