MIAMI – In a decision filed Oct. 3, an appellate court affirmed a decision from the United States Tax Court assessing additional tax liabilities against a media company for the 2001 tax year.
Terry and Sandra Shockley sold their television and radio company, known collectively as Shockley Communications Corporation (SCC), in May 2001, then reported their gains when they filed their federal income taxes for the year. In 2007 the Internal Revenue Service (IRS) determined the couple owed for the 2001 tax year and asserted transferee liability against the Shockleys and the other largest shareholders involved in the sale. The couple filed petitions with the tax court, then appealed that decision to the U.S. Court of Appeals for the 11th Circuit.
District Judge Eduardo Rebreno | https://jnswire.s3.amazonaws.com/jns-media/b6/80/80765/U.S.-District-Judge-Eduardo-C.-Robreno1.jpg
The Shockleys each owned 10.18879 percent of the company’s common stock, along with another 3.52508 percent through their entity Shockley Holdings. The pair also served as members of the board ofdDirectors of SCC. Terry acted as SCC president and treasurer while Sandra acted as vice president and secretary.
In 2000 the Shockleys began considering retirement and considering their options to divest themselves of the company. Terry learned the preference of those in the industry was for an asset sale rather than a stock sale, as those buyers interested in radio stations are not usually interested in television stations and vice versa.
In August 2000, the Shockleys spoke with a representative from Integrated Capital Associates (ICA), which helps companies complete stock sales and that wanted to work with SCC for its sale. ICA wanted to help the Shockleys organize a “buy stock/sell assets” transaction in which the Shockleys would see the stock to ICA and it would immediately sell the assets to a buyer.
During that conversation, ICA warned the Shockleys that there was a change the IRS might consider the transaction an asset sale, but that had not happened to the company in 18 years of facilitating such transactions. The Shockleys and other shareholders decided to work with ICA, so ICA incorporated Northern Communications Acquisition Corp (NCAC) to serve as the entity to buy the SCC stock.
By December 2000, NCAC had entered into three separate purchase agreements for the purchase and sale of SCC. NCAC would buy SCC shareholders’ stock for $117 million as part of a stock transaction, then sell SCC’s Wisconsin television stations to another company, QNI, for $168 million, and the Minnesota television station to another company for $3 million. ICA later entered into another agreement, this one with Midwest Communications, for the purchase of SCC’s radio assets for $7.5 million.
The transactions were conducted May 31, and SCC did not acquire any tax liability. As a result of the sale, Terry received $10.98 million for his shares, Sandra received $11.24 million and their corporation Shockley Holdings received $4.05 million.
According to the appellate court’s opinion, written by District Judge Eduardo C Robreno with circuit judges Gerarld Bard Tjoflat and Charles R. Wilson concurring, the IRS determined in September 2007 that SCC was responsible for further taxes and that the shareholders “were liable as transferees for SCC’s corporate income tax liabilities.”
Upon appeal, Robreno notes that “generally, taxpayers have the right to minimize or avoid their taxes by any means permitted by law” but this does not extend to structuring a “paper entity to avoid tax.” The court also felt that “Petitioners’ contention that they ‘engaged in one transaction - the sale of their SCC stock to NCAC for cash’ is disingenuous at best.”
The appellants disputed the application of the substance-over-form doctrine, under which the Tax Court imposed substantive liability because the company “was insolvent at the time of the transfer or became insolvent as a result of the transfer,” according to the opinion. They claim that the Commissioner was incorrect in applying this doctrine.
The court, however, did not find an error in the insolvency assessment, so supported the decision to label the Shockleys as transferees. Ultimately, the court found that the stock sale/asset sale transaction should be disregarded, and SCC should be deemed “to have transferred the proceeds of its highly appreciated assets to its shareholders, including Petitioners,” Robreno wrote.