In Marshall v. Commissioner, T.C. Memo. 2016-119, the U.S. Tax Court concluded that business owners who sold their stock was liable for the buyer’s Federal income taxes that arose after the sale.

Facts & Procedural History

The taxpayers owned Marshall Associated Contractors, Inc. (MAC), which was subject to tax as a Subchapter C corporation.

MAC was formed in 1965 and operated as a construction contractor specializing in heavy construction, including sewer and water pipe installation. MAC’s business activities were wound down in the late 1990’s.

MAC’s only business activity after 2000 was the rental of its heavy equipment and its land.

On May 16, 2002, MAC received a $40,033,130 litigation award from U.S. Bureau of Reclamation. It also received smaller payments later that year for interest on this payment.

The taxpayers came across Fortrend International (Fortrend), which “specializes in structuring transactions to solve specific corporate tax problems.” Fortrend sent taxpayers a letter of intent to purchase their MAC stock. The letter of intent was from Essex Solutions, Inc. (Essex).

The Marshalls engaged PwC and the law firm of Schwabe Williamson & Wyatt (Schwabe) to advise them in connection with the Essex letter of intent.

The stock sale closed and the taxpayers received payment for their stock. Fortend/Essex reported a tax loss on MAC’s Federal income tax return and then dissolved under state law.

The IRS audited the tax return and disallowed the loss and assessed $15,482,046 in Federal income tax and a $6,192,818 penalty for fiscal tax year ending March 31, 2003.

Fortend/Essex did not challenge the IRS’s determination.

When the IRS was not able to locate any assets for MAC, it sent notices of transferee liability to the taxpayers.

The issue for the court was whether the taxpayers were subject to transferee liability under Section 6901 for the Federal income tax liability that arose after the sale.

Section 6901 provides the IRS with a remedy for enforcing and collecting from the transferee of property the transferor’s existing tax liability. It allows the IRS to assess the tax against the transferee.

The court considered Oregon’s Uniform Fraudulent Transfer Act (UFTA) laws. These laws make a transferee liable if they had constructive knowledge of the fraud. The court had this to say of the taxpayer’s knowledge:

before the MAC transaction closed, each of the Marshalls was warned by Schwabe (a law firm) of the risks of transferee liability and John (one of the taxpayers) was warned by PwC (an accounting firm) that the stock sale was similar to a listed transaction and was advised by PwC not to engage in the stock sale. Petitioners (taxpayers) knew that the Stillwater litigation award would be considered income to MAC and be subject to corporate income tax for 2003. This knowledge motivated petitioners to enter into a transaction to mitigate this tax liability.

Thus, the court concluded that the taxpayer’s had constructive knowledge.

The court reached this conclusion in this case even though it recently refused to apply transferee liability under Section 6901 in another Fortend case. In the other case, the court considered Florida law–which differs from Oregon law–and the fact that the taxpayer in that case was not provided sufficient information about Fortend’s tax strategy and that it was an asset and not a stock sale.

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