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Salus Mundi Foundation v. Commissioner of Internal Revenue

United States Court of Appeals, Ninth Circuit

December 22, 2014

SALUS MUNDI FOUNDATION, Transferee, Petitioner-Appellee,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant

Argued and Submitted, San Francisco, California November 21, 2014

Page 1011

Appeal from a Decision of the United States Tax Court. Tax Ct. No. 24741-08.

SUMMARY[**]

Tax

The panel reversed the United States Tax Court's decision that the Salus Mundi Foundation was not liable under 26 U.S.C. § 6901 for unpaid tax liability arising from the sale of appreciated assets held by Double-D Ranch, Inc., and remanded.

The panel concluded that the two requirements of section 6901, transferee status under federal law and substantive liability under state law, are separate inquiries. Adopting the reasoning of Diebold Foundation, Inc. v. Comm'r, 736 F.3d 172 (2d Cir. 2013), the panel held that the state law substantive liability requirement was satisfied because the Double-D shareholders made a fraudulent conveyance under the New York Uniform Fraudulent Conveyance Act. The panel remanded to the Tax Court to determine: (1) Salus Mundi's status as a transferee of a transferee under the federal law inquiry of section 6901; and (2) whether the IRS assessed liability within the applicable limitations period.

Arthur T. Catterall (argued), Kenneth L. Greene, and Gilbert S. Rothenberg, Attorneys, Tax Division, Department of Justice, Washington, D.C., for Respondent-Appellant.

A. Duane Webber (argued), Phillip J. Taylor, Summer M. Austin, and Mireille R. Zuckerman, Baker & McKenzie, LLP, Washington, D.C.; Jaclyn Pampel, Baker & McKenzie, Chicago, Illinois, for Petitioner-Appellee.

Before: John T. Noonan and Sandra S. Ikuta, Circuit Judges, and William H. Albritton, Senior District Judge.[*] Opinion by Judge Noonan.

OPINION

Page 1012

NOONAN, Circuit Judge.

OVERVIEW

The IRS appeals the United States Tax Court's decision that the Salus Mundi Foundation was not liable under 26 U.S.C. § 6901 for the unpaid tax liability arising from the sale of appreciated assets held by Double-D Ranch, Inc.

We conclude that the two requirements of 26 U.S.C. § 6901 -- transferee status under federal law and substantive liability under state law -- are separate and independent inquiries. Therefore, the IRS cannot rely on federal law to recharacterize the series of transactions for purposes of the state law inquiry.

The Second Circuit addressed the same factual and legal issues in Diebold Foundation, Inc. v. Comm'r, 736 F.3d 172 (2d Cir. 2013). We adopt the reasoning of that opinion on the state law inquiry and conclude that the Double-D shareholders had constructive knowledge of the fraudulent tax avoidance scheme at issue. Accordingly, we collapse the series of transactions and conclude that the shareholders made a fraudulent conveyance under the New York Uniform Fraudulent Conveyance Act and that the state law liability prong of 26 U.S.C. § 6901 was therefore satisfied.

We remand to the Tax Court to determine in the first instance: (1) Salus Mundi's status as a transferee of a transferee under the federal law inquiry of 26 U.S.C. § 6901; and (2) whether the IRS assessed liability within the applicable limitations period.

FACTUAL AND PROCEDURAL HISTORY

A. Background on the Diebold Family and Double-D Ranch, Inc.

Richard Diebold was a major shareholder of American Home Products Corporation (AHP), a publicly traded corporation. In 1980, he formed Double-D Ranch, Inc. as a personal holding company for investment assets, including shares of AHP, other marketable securities, and real estate. Richard Diebold was married to Dorothy Diebold, and they had three children.

When Richard Diebold died in 1996, ownership of all the stock of Double-D was transferred to the Dorothy R. Diebold Marital Trust. The marital trust had three cotrustees: Dorothy Diebold; the Bessemer Trust Co.; and Andrew Bisset, Dorothy Diebold's personal attorney. Austin Power, Jr. was a senior vice president

Page 1013

at Bessemer Trust who served as counsel and primary account manager for the marital trust.

In 1999 Dorothy Diebold was 94 years old and " anxious" to make cash gifts to her children. Power explained to her that the marital trust was insufficiently liquid to make such gifts, but she would be able to make cash gifts if she were to sell the shares of Double-D. After this explanation, " she was anxious for [Bessemer] to proceed with the sale of the Double D Ranch," and the other trustees agreed.

As part of the decision to sell Double-D, the marital trust transferred one-third of the Double-D shares to the Diebold Foundation, a charitable foundation incorporated by Richard Diebold in 1963 in New York. In 1999 its directors were Dorothy Diebold, Bisset, and Dorothy Diebold's three adult children. Each of the three adult children intended to organize their own foundations, one of which became the Salus Mundi Foundation. The directors of the Diebold Foundation planned to sell the shares of Double-D and distribute the money to the children's foundations.

Power was given primary responsibility by the Double-D shareholders to sell the shares of Double-D.

B. Double-D's Built-In Gain Tax Liability and the Use of Intermediary Transactions

In 1999, Double-D's assets were valued at approximately $319 million, including approximately $129 million of AHP stock, $162 million of other marketable securities, and $6 million of real estate in a Connecticut farm; the adjusted tax bases of these assets were nominal or low. If Double-D simply sold its assets, it would be taxed on the built-in gain of those assets, i.e. the difference between the selling price of the assets and their adjusted tax bases. See 26 U.S.C. ...


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