-Source-Forbes-
Slone Broadcasting Co. sold its assets to Citadel Broadcasting Co. for $45 million, which generated a tax liability of $15.3 million to Slone's shareholders, James and Norma Slone and their trust. The Slones then sold Slone Broadcasting's stock to Berlinetta, Inc., and Berlinetta, Inc., which latter company assumed Slone Broadcasting's tax liability and made additional payments to the Slones individually equal to two-thirds of the $15.3 million in taxes owed by Slone Broadcasting, or about $10.2 million. Berlinetta was able to make this latter payment by taking out a loan.
Fraudulent Transfers a/k/a Avoidable TransactionsJDA
Berlinetta and Slone Broadcasting were then merged into a new company called Arizona Media Holdings, Inc., which -- strangely -- claimed to be in the debt collection business. After Arizona Media paid off the loan that Berlinetta had used to pay the Slones individually, Arizona Media was left with no money to pay the IRS the $15.3 million in tax liability that was still owed. So, the IRS sued the Slones under Arizona's Uniform Fraudulent Transfers Act to recover the $10.2 million that they had received from Berlinetta.
The U.S. Tax Court originally found in favor of the Slones, and the IRS appealed to the U.S. Ninth Circuit Court of Appeals. That Court reversed the first U.S. Tax Court decision, and remanded the case back to the lower court with instructions that the Slones:
would be subject to transferee liability if two conditions were satisfied: first, the relevant objective and subjective factors must show that under federal law the transaction with Berlinetta lacked independent economic substance apart from tax avoidance; and second, [the Slones] must be liable for the tax obligation under applicable state law.
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