Sellers in Stock and Asset Sales Not Subject to Transferee Liability (Sloan, TCM)

In a case involving the sale of a radio broadcasting corporation, in which an asset sale and a subsequent stock sale were improperly used to offset gain, the sellers were not subject to transferee liability. The corporation, which operated several radio stations over many years, was owned by married individuals through two trusts. The taxpayers sold the corporation’s assets, excluding the corporate name, to another corporation. About six months later, the taxpayers sold the stock in the corporation to a different purchaser. This sale included all of the stock in the taxpayer’s corporation, along with the proceeds it had received from the asset sale. There had been no distributions by the corporation in the interval between the two sales. The purchaser, its attorneys, and other persons participating in the asset sale were different from those participating in the stock sale.

The corporation, with a new name and owners and no further link to the taxpayers, was investigated by the IRS, and its ostensible president signed several agreements over the years extending the period of limitations for assessment of taxes and penalties. The corporation was found liable for taxes and penalties, which it failed to pay, resulting in its being subject to levy by the IRS. The corporation was eventually dissolved and nothing was collected from it by the IRS. The IRS issued transferee liability notices to the taxpayers, maintaining that the trusts were liable as transferees of assets for the unpaid liability of the now-dissolved corporation for the year of the stock sale.

Under Code Sec. 6901(c)(1), the time to assess transferee liability is limited to one year after expiration of the limitations period of the transferor. Under Code Sec. 6062, extensions may be signed by a corporate officer authorized to do so. The corporation’s president had signed several consents to extend the period for assessing liability against the corporation as transferor. The taxpayers argued that the president had held another corporate office, as well as that of president, in violation of the corporation’s bylaws, thus invalidating his status as corporate president. However, the corporation had held that individual out as its president, so he had ostensible authority to sign the consent to extend the period of limitations, even if state law precluded his having actual authority.

Next, the IRS advanced the “substance over form” doctrine to recast the stock sale as a liquidating distribution. The Tax Court declined to find the form of the transactions invalid, since the two sales were independent of one another, and there was no evidence that the taxpayers were aware of the stock purchaser’s plans to offset gain from the asset sale through illegitimate means.

N.L. Slone, TC Memo. 2012-57, Dec. 58,964(M)

Other References:

Code Sec. 6062

CCH Reference – 2012FED ¶36,623.16

Code Sec. 6901

CCH Reference – CCH Reference – 2012FED ¶40,720.191

CCH Reference – 2012FED ¶40,720.184

CCH Reference – 2012FED ¶40,720.289

CCH Reference – 2012FED ¶40,720.296

Tax Research Consultant

CCH Reference – TRC IRS: 30,124

CCH Reference –
TRC IRS: 60,050


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