Salus Mundi Foundation v. CIR, No. 12-72527 (9th Cir. 2014)
Annotate this CaseThe IRS challenged the 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. The court concluded that the two requirements of section 6901 - transferee status under federal law and substantive liability under state law - are separate and independent inquiries. Consequently, the IRS cannot rely on federal law to recharacterize the series of transactions for purposes of the state law inquiry. The court adopted the Second Circuit's reasoning in Diebold Foundation, Inc. v. Comm'r on the state law inquiry and concluded that the Double-D shareholders had constructive knowledge of the fraudulent tax avoidance scheme at issue. Therefore, the court collapsed the series of transactions and concluded that the shareholders made a fraudulent conveyance under the New York Uniform Fraudulent Conveyance Act and that the state law liability prong of section 6901 was satisfied. The court remanded to the district court for further determinations.
Court Description: 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.
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