Slone v. CIR

To determine whether a company, which sold its shares, received any practical economic benefits other than the creation of income tax losses, the court must consider relevant subjective and objective factors.

Slone Broadcasting Co. (“Slone”) sold all of its assets to Citadel Broadcasting Co. (“Citadel”), and Slone’s shareholders sold all of their stocks to Berlinetta, Inc.—later named Arizona Media Holdings, Inc. (“Arizona Media”)— which administratively dissolved. In 2005, upon investigating Arizona Media, the Internal Revenue Service (“IRS”) noticed Arizona Media failed to pay taxes as a result of the sale, totaling to $22.5 million. The IRS sent notices of tax liability to the former shareholders of Slone, claiming that they were still liable as transferees under federal law for taxes owed on Slone’s asset sale. The IRS further claimed that Slone shareholders received “liquidated distribution,” and asserted that the form of the stock sale should be disregarded. Slone shareholders contended that the sale was legitimate, and that “the form must be respected.” On appeal, the Ninth Circuit held that the shareholders did not receive a liquidated distribution, and that the form of the transaction must be respected. In such a situation, the panel noted that the court must conduct a test which considers “the relevant subjective and objective factors to determine whether the formal transaction had any practical economic effects other than the creation of income tax losses.” However, since the lower court did not apply that test, the panel remanded the case for the Tax Court to apply the proper legal standard. VACATED and REMANDED.