                              T.C. Memo. 2015-113



                        UNITED STATES TAX COURT



          SANDRA K. SHOCKLEY, TRANSFEREE, ET AL.,1 Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent*



      Docket Nos. 28207-08, 28208-08,             Filed June 22, 2015.
                  28210-08.



      Jenny L. Johnson, Aharon S. Kaye, Guinevere M. Moore, Ziemowit T.

Smulkowski, and Alexander S. Vesselinovitch, for petitioners.

      Lyle B. Press, Steven N. Balahtsis, and Gail Campbell, for respondent.




      1
       Cases of the following petitioners are consolidated herewith: Terry K.
Shockley, Transferee, docket No. 28208-08; and Shockley Holdings, Limited
Partnership, Transferee, docket No. 28210-08.
      *
       This opinion supplements our previously filed opinion, Shockley v.
Commissioner, T.C. Memo. 2011-96, rev’d and remanded, 686 F.3d 1228 (11th
Cir. 2012).
                                         -2-

     [*2] SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND
                          OPINION


      COHEN, Judge: These cases are before us on remand from the U.S. Court

of Appeals for the Eleventh Circuit in Shockley v. Commissioner, 686 F.3d 1228

(11th Cir. 2012) (Shockley II), rev’g and remanding T.C. Memo. 2011-96

(Shockley I). The Court of Appeals in Shockley II reversed our decisions entered

in accordance with Shockley I, in which we decided the period of limitations issue

in favor of petitioners. Accordingly, these cases were remanded to this Court for

further proceedings on the issues that were not reached in Shockley I.

      Subsequent to the remand, the Court of Appeals for the Seventh Circuit in

Feldman v. Commissioner, 779 F.3d 448 (7th Cir. 2015), aff’g T.C. Memo.

2011-297, interpreted Wisconsin law that we apply in these cases. Although these

cases are appealable to the Court of Appeals for the Eleventh Circuit because

petitioners resided in Florida or had their principal place of business in Florida

when the petitions were filed, we deferred this opinion to consider the

interpretation of Wisconsin law in Feldman, as well as cases involving transferee

liability and “Midco” transactions decided since these cases were submitted.

      In three separate notices of deficiency dated August 21, 2008, respondent

determined that Terry K. Shockley (petitioner), Sandra K. Shockley (Sandra
                                         -3-

[*3] Shockley), and Shockley Holdings Ltd. Partnership (Shockley Holdings)

(collectively, petitioners) are liable as transferees for the Federal income tax

liability, additions to tax, and an accuracy-related penalty of Shockley

Communications Corp. (SCC) for its short tax year ended May 31, 2001.

Respondent determined the value of the assets transferred to petitioners and the

amounts of transferee liability of petitioners in proportion to SCC’s outstanding

liabilities, including interest as provided by law. Consequently, petitioners’

transferee liabilities in dispute are as follows: (1) $10,975,059.03 for petitioner;

(2) $11,244,084.42 for Sandra Shockley; and (3) $4,053,709.13 for Shockley

Holdings.

      The issues for decision on remand are whether petitioners are liable as

transferees for their respective portions of the unpaid determined and assessed

deficiency, additions to tax, penalty, and interest with respect to SCC’s corporate

income tax for its short tax year ended May 31, 2001; whether SCC is liable for

the determined and assessed deficiency in tax, additions to tax, penalty, and

interest for its short tax year ended May 31, 2001; and whether the Internal

Revenue Service (IRS) adequately pursued collection efforts against SCC.

      The parties have agreed that these cases may be decided on remand on the

evidence submitted at the original trial. Unless otherwise indicated, all section
                                         -4-

[*4] references are to the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and Procedure.

                                  FINDINGS OF FACT

       Facts with respect to these cases, some of which were stipulated, were found

in Shockley I and are incorporated in our findings by this reference. We

summarize for convenience relevant facts from Shockley I and set forth additional

findings for purposes of deciding the issues on remand. Petitioner and Sandra

Shockley (collectively, Shockleys) resided in Florida at the time they filed their

petitions. Shockley Holdings is a limited partnership formed in 1998 under the

laws of the State of Wisconsin, and its principal place of business was Florida at

the time it filed its petition.

       Petitioner received a master’s degree in radio, television, and film from the

University of Kansas. In the mid-1960s, petitioner started his career as the news

and sports director of a small radio station. He later worked for a television

station--first in sales, then in management, and finally as the president of the

station. In 1985, petitioner left that position and formed SCC by purchasing a

radio station in Madison, Wisconsin. Petitioner incorporated SCC, a closely held

corporation, in March 1985 under the laws of the State of Wisconsin.
                                       -5-

[*5] Sandra Shockley, who holds a bachelor’s degree, taught school for 11 years

before joining her husband to start SCC in 1985. She was initially a salesperson

for SCC and later became the local sales manager and then the national sales

manager. In 1995 she was promoted to the head of the radio division.

      Between 1985 and 2000, SCC grew to own five television stations, a radio

station, and a video production company in Wisconsin, as well as a television

station and several radio stations in Minnesota. During this time, SCC brought in

additional investors to fund the business expansion. By May 31, 2001, SCC was

owned by 29 shareholders including petitioners, other individuals, a number of

investment funds, and the State of Wisconsin Investment Board (collectively, SCC

shareholders).

      Petitioner owned 10.18879% of SCC’s common stock and served as

president and treasurer of SCC and a member of the SCC board of directors (SCC

board). Sandra Shockley owned 10.18879% of SCC’s common stock and served

as vice president and secretary of SCC and a director on the SCC board. Shockley

Holdings owned 3.52508% of SCC’s common stock. Shockley Holdings is owned

by the Shockleys, who are general partners, and their adult children, who are

limited partners.
                                         -6-

[*6] In 1999 the Shockleys, approaching retirement age, started to consider their

future as owners of SCC. Around early 2000 they began exploring several

strategic alternatives for SCC, including selling it. On January 21, 2000, the

Shockleys met with Stephen A. Schmidt, a managing director and tax partner of

RSM McGladrey, Inc. (RSM). RSM, an affiliate of SCC’s accounting firm

McGladrey & Pullen, is a professional services firm that offers accounting, tax,

and other services to middle-market companies and provided SCC and its

shareholders with tax and structuring advice.

      During their meeting and through later communications, the Shockleys,

other members of the SCC board, and RSM discussed six potential alternative

futures for SCC: (1) a sale of assets by SCC followed by its liquidation; (2) a sale

of SCC stock; (3) tax-free reorganizations under section 368; (4) a “spin-off” of

the SCC’s radio station assets (radio assets) under section 355 followed by a sale

of SCC stock; (5) redemption of SCC stock from the shareholders, and (6) a sale

of SCC stock using an employee ownership plan. RSM presented analyses, based

upon certain assumptions, comparing the impact on a buyer who purchases stock

or purchases assets, as well as a seller who sells stock or sells assets. One stock

sale analysis by RSM, which assumed a value of $190 million for the radio and

television assets, showed net after-tax liquidation proceeds to shareholders of $94
                                        -7-

[*7] million for a stock sale compared with the correlating asset sale proceeds of

$75 million.

      In February 2000, the Shockleys met with a media broker, Kalil & Co., Inc.

(Kalil), also to discuss alternatives for SCC. They had engaged Kalil before, in

1996, to sell one of their radio stations. On April 5, 2000, petitioner signed an

exclusive brokerage agreement with Kalil. After the brokerage agreement was in

place, Kalil began seeking potential buyers for SCC.

      During their communications, Schmidt introduced the Shockleys to

Integrated Capital Associates (ICA), a firm that facilitated stock sales of

companies. In April 2000, petitioners met Eric Sullivan, a principal of ICA, to

learn about his company’s services.

      Over the next several months, the Shockleys continued to seek and receive

advice from RSM and communicated regularly with Kalil regarding efforts to sell

SCC. As to RSM, the SCC board reviewed the analysis that Schmidt prepared

comparing a stock sale with an asset sale, which projected the stock sale

producing a much greater return of net after-tax proceeds to shareholders. For that

reason, the SCC board decided to pursue a stock sale. At some point, however,

petitioner realized that the general preference of buyers in the broadcasting

industry was an asset sale.
                                         -8-

[*8] While Kalil was able to find potential buyers interested in SCC’s assets, the

Shockleys discovered that it was unlikely that a broadcasting business would be

interested in buying the stock of a company, like SCC, that had both television

stations and radio stations. Such a sale was unlikely because buyers showing

interest in the small-market radio stations were not interested in the medium-sized-

market television stations, and vice versa. One potential buyer, Quincy

Newspapers, Inc. (QNI), a media company in Quincy, Illinois, made an offer in

May 2000. Structured as an asset sale, the offer tendered a purchase price of $160

million for SCC’s television stations and production company (television assets),

which made up approximately 95% of SCC’s total radio and television assets.

      In a letter dated June 7, 2000, Kalil made petitioner aware of two companies

that would potentially be willing to buy the stock of SCC and then sell its assets to

third party buyers: Fortrend International, LLC (Fortrend), and Diversified Group

(Diversified). As Kalil explained in the letter, this “buy stock/sell assets”

transaction would have Fortrend or Diversified “‘own’ Shockley Communications

for about one hour” with a negotiated fee for its services of somewhere between

5% and 7% of the gain.

      On or about August 25, 2000, Schmidt organized a conference call wherein

the Shockleys, among others, would speak with David Kelley, an employee and/or
                                          -9-

[*9] partner at ICA. The agenda for the conference included an overview of ICA,

the possible use of a “Midco” transaction for the stock sale of SCC, and a

discussion of why ICA should be selected over Fortrend or Diversified. During

the conference, the attendees, including the Shockleys, were informed that there

was a risk that the IRS might recharacterize the transaction as an asset sale.

However, ICA represented that none of the similarly structured transactions it had

facilitated over an 18-year period had been successfully challenged or unwound.

      If engaged to effect the sales of SCC’s stock and assets, some of the

principals and agents of ICA that would be involved in the process were Sullivan,

ICA Chief Financial Officer Howard Teig, and Roger Ohlrich, an agent of ICA.

In contemplation of doing business with ICA, petitioner made some calls to firms

that had previously done business with ICA.

      Throughout the summer of 2000, negotiations continued with QNI

regarding the sale of SCC’s television assets, but no agreement was reached. In

September 2000, QNI indicated that it was willing to consider structuring the

transaction as a purchase of the SCC stock instead of its assets and asked Kalil to

provide SCC’s asking price for the stock. In response, petitioner drafted a letter

dated September 6, 2000, to QNI that (1) showed SCC’s projected purchase prices

for a stock sale and, alternatively, for an asset sale, (2) indicated that they could
                                        - 10 -

[*10] proceed with a transaction structured either way, (3) provided an analysis

comparing an asset purchase with a stock purchase, and (4) explained that the cash

savings to SCC of a stock sale, rather than an asset sale, would be $11 million. He

continued explaining that

      [t]his [$11 million] represents the transaction cost quoted to us by an
      independent company (‘Midco’ is the generic term used for the firms
      which specialize in buying a company’s stock, offsetting the taxable
      gains incurred, and reselling the assets to a third party). * * * Please
      note that we do have a ‘Midco’ company arrangement standing by to
      proceed--they would purchase SCC’s stock and sell QNI the assets--
      at the negotiated price shown. In discussions with them and with our
      FCC Counsel, we have been assured that both the Midco purchase of
      SCC stock and the Midco sale of the TV assets to QNI can proceed
      simultaneously with the FCC and should not significantly delay a
      Closing.

QNI did not agree to the terms presented in that letter and never agreed to buy the

stock of SCC but remained interested in the television assets.

      In September 2000 the SCC board decided to sell SCC’s stock to an affiliate

of ICA. Petitioner informed Kalil that the SCC shareholders intended to sell their

stock. Kalil, however, would continue to negotiate with QNI, on behalf of an ICA

affiliate, regarding the price and terms of a potential sale of SCC’s assets.

      On October 6, 2000, QNI faxed a nonbinding letter of intent to ICA

regarding the purchase of the television assets from the undisclosed client of ICA

for $167 million. That same day, ICA organized Northern Communications
                                         - 11 -

[*11] Acquisition, LLC (NCA LLC), a Delaware limited liability company. On

October 13, 2000, NCA LLC, as trustor and beneficiary, and Ohlrich, as trustee,

executed a trust agreement forming Northern Communications Statutory Trust

(NCS Trust) under the laws of Connecticut. According to the trust instrument,

NCS Trust was established for the sole purpose of acquiring the stock of SCC.

      Kalil maintained negotiations with QNI regarding the final price of the

potential purchase. On October 27, 2000, QNI sent to Kalil a letter offering to

purchase the television assets for $171 million along with a revised draft of the

nonbinding letter of intent between QNI and ICA on behalf of the still-undisclosed

client of ICA. On October 31, 2000, Kalil, on behalf of the seller, sent to QNI a

letter accepting its offer to purchase the television assets.

      On December 1, 2000, counsel for ICA incorporated Northern

Communications Acquisition Corp. (NCAC), a Delaware corporation and a wholly

owned subsidiary of NCS Trust. NCAC was created to serve as the entity that

would purchase the SCC stock. Ohlrich became the president of NCAC, as well

as the chairman and sole member of its board of directors.

      Petitioner did not conduct any in-depth background investigation of NCS

Trust or NCAC. However, during negotiations about the stock purchase, the SCC

shareholders voiced concerns about the creditworthiness of NCAC. ICA
                                        - 12 -

[*12] responded to these concerns by forming Northern Communications Fund,

LLC (NC Fund), which was wholly owned by ICA-related entity Integrated

Acquisitions Group, LLC (IAG). NC Fund and another entity, Slabfork LLC, then

became the 85% and 15% owner-members, respectively, of the already established

NCA LLC. In a letter dated December 28, 2000, to petitioner in his capacity as

shareholder representative, IAG represented that, through NC Fund, NCA LLC,

and NCS Trust, it would cause NCAC to be capitalized with either cash or

technology interests.

        Although the intent was for QNI to purchase all the television assets,

Federal Communications Commission (FCC) regulations prohibited QNI from

purchasing the Minnesota television station because of market conflict. QNI,

however, still wanted an economic benefit from its relationship with the

Minnesota television station, as well as an option to buy it later, if possible. To

accommodate QNI, the Shockleys organized a company--TSTT, LLC (TSTT), a

Wisconsin entity--that would purchase the Minnesota television station from

NCAC. This measure would comply with FCC regulations yet still maintain

QNI’s interests as expressed through a joint services agreement. At some point

prior to January 23, 2001, TSTT was renamed Shockley Broadcasting, LLC (SB

LLC).
                                         - 13 -

[*13] By the end of December 2000, NCAC entered into three agreements: (1) a

stock purchase agreement (SPA) with the SCC shareholders dated December 28,

2000; (2) an asset purchase agreement with QNI (QNI APA) dated December 29,

2000; and (3) an asset purchase agreement with TSTT (TSTT APA) dated

December 29, 2000. The SPA provided that the SCC shareholders would sell to

NCAC all the SCC stock for a purchase price of $117 million, subject to certain

adjustments. The QNI APA involved the sale of the Wisconsin television stations

and production company by NCAC to QNI for $168 million, subject to certain

adjustments, and the TSTT APA involved the sale of the Minnesota television

station by NCAC to TSTT for $3 million.

      On January 19, 2001, the IRS released Notice 2001-16, 2001-1 C.B. 730,

clarified by Notice 2008-111, 2008-51 I.R.B. 1299, which described certain

transactions as types of an “intermediary transactions tax shelter”, identified those

transactions as listed transactions, and took the position that direct or indirect

participants of the same or substantially similar transactions would be required to

disclose their participation in accordance with section 1.6011-4T(b)(2), Temporary

Income Tax Regs., 65 Fed. Reg. 11207 (Mar. 2, 2000). After Notice 2001-16,

supra, was issued, Schmidt sent copies of it to the Shockleys and their legal

counsel because he believed that the proposed transaction with ICA had some
                                        - 14 -

[*14] similarity with the transactions described in the notice. Petitioner

understood Notice 2001-16, supra, to be an advisory notice.

        In early 2001 Ohlrich toured the stations that SCC owned and was

introduced to SCC employees as the president of the company that was purchasing

SCC. In addition, NCS Trust applied for a loan of $175 million from Ultrecht-

America Finance Co. (UAFC), a subsidiary of Coöperatieve Centrale

Raiffeisen-Boerenleenbank, B.A. (Rabobank), in contemplation of purchasing the

SCC stock.

        On or around January 23, 2001, NCAC, SCC, QNI, and SB LLC filed

applications with the FCC seeking consent for the SCC stock sale, transfer of the

television stations, and assignment of broadcast station licenses as the parties’

respective transactions required. In order to obtain the FCC consents, the parties

of the transactions had to publish and broadcast notices of the applications to

which the public could file comments, petitions to deny, or objections with respect

to each application.

        In a letter dated March 29, 2001, Midwest Communications, Inc. (Midwest),

a Wisconsin corporation, made an offer to purchase the SCC radio assets from

NCAC for $7.5 million. NCAC, through Ohlrich, accepted the offer on March 31,

2001.
                                        - 15 -

[*15] On April 5, 2001, ICA’s counsel incorporated Shockley Delaware Corp.

(SDC), which was wholly owned by NCAC. SDC was created, in part, to hold

SCC’s assets after the acquisition. On or after April 27, 2001, ICA’s agents

formed Northern Communications Holdings Co. (NC Holdings), which had the

same officer and director as NCAC, namely Ohlrich. ICA had instructed that NC

Holdings was to be created to serve as an intermediate company so that NC

Holdings would wholly own NCAC while being wholly owned by NCS Trust.

      In a business letter to petitioner, SCC, QNI, and Midwest dated April 16,

2001, Frank Kalil, the president of Kalil, referenced a discussion that he had had

with petitioner regarding Kalil’s fee schedule. He wrote: “Also, we discussed

waiving * * * [Kalil’s] fee on the midco expense of $9 million to which I have

agreed. In other words, our exclusive agreement fee schedule is applicable for

$162 million on the television station sale and dollar-for-dollar on the radio station

sale or a combined $178.5 million less $9 million equaling $169.5 million.” In a

business letter drafted on May 1, 2001, to Kalil, petitioner referenced an attached

exhibit A, which showed a “Stock Transaction Fee- ICA ($9,000,000)”. In a letter

dated May 10, 2001, Robert A. Pasch, an attorney for SCC and the SCC

shareholders, relayed to petitioner that “the fee calculation should not be attached
                                         - 16 -

[*16] at all to the letter” and that “ICA strongly suggested that there be no

documents / correspondence discussing the ICA fee”.

      On May 15, 2001, UAFC, which had financed other acquisitions by ICA,

approved the loan request of NCS Trust, which would take the form of a

promissory note up to $175 million made by NCS Trust in favor of Rabobank.

Purportedly, the proceeds of the note would be used to fund NCAC’s purchase of

SCC’s stock. Besides pledges to be made by NCS Trust, the note would at all

times be fully secured by an amount in excess of the borrowed funds as provided

by QNI and to be held in an escrow account (escrow I) or, alternatively, QNI

would provide Rabobank with irrevocable payment instructions for cash held at

First Union National Bank (First Union). Rabobank expected the loan to be repaid

within two days of its being made from the proceeds of the QNI APA, and it

expected to receive a transaction fee.

      Midwest and NCAC entered into an asset purchase agreement on May 25,

2001 (Midwest APA), with respect to the SCC radio assets. NCAC, SCC, QNI,

and SB LLC received the FCC consents for their various applications on May 30,

2001. Also on that date, UAFC, NCS Trust, NCAC, the SCC shareholders, and

Rabobank entered into an agreement regarding a second escrow account (escrow

II) with Rabobank serving as the escrow agent. According to the agreement,
                                        - 17 -

[*17] NCAC, using NCS Trust’s loan proceeds, would deposit an amount equal to

the SPA purchase price into escrow II from which the SCC shareholders would

subsequently be paid for their stock.

      On May 31, 2001, the closings of the sale of SCC stock and the sales of

SCC assets took place at one of the law firms representing ICA and NCS Trust.

Ohlrich, as trustee of NCS Trust and with respect to its promissory note, instructed

UAFC to draw down $130 million and to credit the funds to NCS Trust’s

Rabobank account. At the same time, Ohlrich authorized UAFC to debit from the

same account Rabobank’s transaction fee of $750,000. He transferred the

remaining $129,250,000 of loan proceeds to NC Holdings in exchange for 100

shares of NC Holdings’ preferred stock (preferred stock) given to NCS Trust, and

then he pledged both NC Holdings’ common and preferred stock (held by NCS

Trust) to UAFC as additional security for repayment of the loan. However, NC

Holdings then contributed the $129,250,000 loan proceeds to NCAC as a

contribution to capital.

      From that contribution, NCAC deposited $96,113,235.68 into escrow II. In

accordance with the SPA and the escrow II agreement, the SCC shareholders,

including petitioners, sold all their shares of SCC to NCAC. An amount of

$94,713,235.68 from escrow II was then transferred to a third escrow account
                                        - 18 -

[*18] created for the (now former) SCC shareholders from which disbursements

would be made to them. SCC then became a wholly owned subsidiary of NCAC.

      In exchange for their shares, petitioner initially received $8,478,007.29 (and

also had an outstanding loan from SCC of $744,981.83 paid off on his behalf),

Sandra Shockley initially received $8,747,032.68 (and also had an outstanding

loan of $475,956.44 from SCC paid off on her behalf), and Shockley Holdings

initially received $3,190,032.69. Petitioners also received a right to deferred

payments from NCAC in exchange for their SCC stock. The Shockleys resigned

from all of their positions in SCC as of that date.

      Also on May 31, 2001, QNI, NCAC, UAFC, and First Union entered into an

agreement with respect to escrow I. First Union served as the escrow agent, and

QNI and some of its subsidiaries were the guarantors. In accordance with the

escrow I agreement, QNI had caused to be deposited in escrow at least the sum

required under the QNI APA for the purchase of the agreed-upon television assets.

The agreement provided that all amounts paid from escrow I were to be applied to

the satisfaction of QNI’s obligation to pay the QNI APA purchase price and the

obligation to repay the UAFC loan. The agreement also provided that UAFC

would be repaid that day, absent any unusual circumstances.
                                      - 19 -

[*19] Thereafter Ohlrich, now as president of both SDC and SCC, caused SCC to

merge with and into SDC. Ohlrich then formed a new limited liability company

under Delaware law named Shockley Communications Acquisition, LLC (SCA

LLC). Effectively at the same time, Ohlrich authorized SDC to convert from a

corporation to a limited liability company, and it thus converted into SCA LLC.

Immediately following, SCA LLC admitted an additional member, Hare Street

Trading, L.P., an Isle of Man limited partnership, which acquired a 1%

membership interest. SCA LLC purchased the preferred stock subject to the

UAFC loan obligation of NCS Trust. SCA LLC assumed this repayment

obligation, whereupon UAFC released NCS Trust from its loan obligation. NCAC

then merged into NC Holdings, and although NC Holdings was the surviving

entity, its name was nonetheless changed to “Northern Communications

Acquisition Corp.” (NCAC II).

      After that SCA LLC sold its newly acquired television assets to QNI and SB

LLC in accordance with the QNI APA and the TSTT APA, respectively. A

portion of the proceeds from these asset sales was disbursed to UAFC in

repayment of the loan and thus fully discharged SCA LLC’s obligation under the

loan as of May 31, 2001. Ohlrich, as president of NCAC II, instructed Rabobank

to transfer the remaining $33,136,764.32 of the NCAC contribution to capital/loan
                                        - 20 -

[*20] proceeds to an account for SCA LLC. All the above-described events that

occurred on May 31, 2001, with regard to the SPA and QNI APA, took place

within a span of under three hours.

      Leading up to and throughout the closing, all parties, including petitioners,

engaged experienced professionals and attorneys to handle complicated areas of

the transactions including negotiations, FCC regulations, and taxation. SCC and

the SCC shareholders were represented in the sale of the SCC stock by three

different law firms. Per the requests of NCS Trust, NC Holdings, NCAC II, SCC,

SDC, and SCA LLC, a law firm representing NCS Trust issued an opinion letter

on May 31, 2001, regarding the events that transpired that day. The opinion letter

described the resulting tax consequences from the structure of the overall

transaction of May 31, 2001, in part, as follows:

      A. It is more likely than not that:

      1. On conversion of NewShockley [i.e., SDC] into a limited liability
      company with Acquisition [i.e., NCAC] as its sole member, no gain
      or loss will be recognized by Acquisition under Code Section 322(a);
      no gain or loss will be recognized by NewShockley under Code
      Section 337(a); and Acquisition will take a tax basis in the assets of
      NewShockley equal to the basis of such assets in NewShockley’s
      hands immediately prior to the conversation [sic] under Code Section
      334(b).

      2. On the liquidation of Acquisition, no gain or loss will be
      recognized by Holdings [i.e., NC Holdings] under Code Section
                                - 21 -

[*21] 332(a); no gain or loss will be recognized by Acquisition under
Code Section 337(a); and Holdings will take a tax basis in the assets
of Acquisition equal to the basis of such assets in Acquisition’s hands
immediately prior to the liquidation under Code Section 334(b).

3. Acquisition’s tax basis in the stock of Shockley [i.e., SCC]
acquired from Shockley Shareholders [i.e., SCC shareholders] will
equal the amount of cash paid by Acquisition therefor.

4. Until New Investor [i.e., Hare Street Trading, L.P.] acquires a 1%
interest in New Shockley, immediately after conversion of
NewShockley to a limited liability company, NewShockley will be
disregarded for U.S. federal income tax purposes as an entity separate
from Acquisition, its sole owner, with the result that the assets
formerly owned by Shockley will be treated as owned by Acquisition.

5. The contribution of the appreciated property by New Investor to
NewShockley will be treated as a contribution by New Investor and
by Acquisition, NewShockley’s theretofore single member, to a
newly formed partnership, and that such contributions will be
governed by Code Section 721(a).

6. Under Code Section 722, New Investor’s tax basis in its interest in
NewShockley will be equal to the basis of the contributed property in
New Investor’s hands immediately before the contribution and the tax
basis of Acquisition in its interest in NewShockley will equal the tax
basis of the assets of NewShockley immediately before the
contribution by Acquisition.

7. After its conversion to a limited liability company and acquisition
of New Investor as a member thereof, NewShockley will be classified
as a partnership for federal income tax purposes.

8. Ninety-nine percent of the principal amount of the Loan [i.e., the
UAFC loan] will be treated as a contribution of money by Acquisition
to NewShockley under Code Section 752(a) and Treas. Reg. §1.752-3
and Acquisition’s tax basis in its interest in NewShockley will be
                                          - 22 -

      [*22] increased by such amount under Code Section 722. Similarly,
      1% of principal amount of the Loan will be treated as a contribution
      of money by New Investor to NewShockley under Code Section
      752(a) and Treas. Reg. §1.752-3 and New Investor’s tax basis in its
      interest in NewShockley will be increased by such amount under
      Code Section 722.

      9. The merger of Acquisition into Holdings will cause a Code
      Section 708 termination of NewShockley to occur in connection with
      which, assuming NewShockley makes a timely and valid Code
      Section 754 election for its fiscal year ending in 2001, the
      $130,000,000 basis of the Preferred Shares [i.e., preferred stock] in
      the hands of NewShockley will be shifted to the basis of all assets
      then owned by NewShockley (other than the Preferred Shares) and
      the $130,000,000 of tax basis will be allocated among such assets in
      accordance with their respective fair market values.

      NCAC II contracted with Shockley Group, Inc., an entity created by the

Shockleys, to provide consulting services related to the ongoing operations of the

radio stations. On September 21, 2001, NCAC II/SCA LLC sold the radio assets

to Midwest in accordance with the Midwest APA.

      After May 31, 2001, petitioners received the following distributions with

regard to the sale of their stock:

          Date of                                   Sandra       Shockley
        distribution         Petitioner            Shockley      Holdings

      July 24, 2001        $297,596.00         $297,596.00      $102,932.00

     Sept. 10, 2001         212,201.39             212,201.39     73,395.88

     Sept. 25, 2001         678,537.29             678,537.29    234,691.39
                                        - 23 -

[*23] Oct. 30, 2001         12,081.41             12,081.41        4,178.70

      Dec. 21, 2001         40,755.17             40,755.17       14,096.33

      Jan. 25, 2002         10,174.73             10,174.73        3,519.22

      Dec. 20, 2002         14,773.75             14,773.75        5,109.92

       June 6, 2003      1,029,068.00       1,029,068.00         355,932.00

      Oct. 29, 2003        201,864.00            201,864.00       69,821.00

In exchange for their SCC shares, petitioner, Sandra Shockley, and Shockley

Holdings ultimately received $10,975,059.03, $11,244,084.42, and $4,053,709.13,

respectively.

      Petitioners timely filed Federal income tax returns for calendar year 2001

reporting gains from the May 31, 2001, SCC stock sale. On or about February 24,

2002, the IRS received SCC’s Form 1120, U.S. Corporation Income Tax Return,

for its short tax year of January 1 through May 31, 2001. Prepared by Teig, the

Form 1120 listed a Washington, D.C., mailing address for SCC and reported that

SCC had zero assets by the end of its 2001 tax year and zero tax due. It also

reported that on May 31, 2001, SCC had merged into SDC and that immediately

thereafter SDC converted into a Delaware limited liability company resulting in

SCC’s liquidation and tax-free distribution under section 332.
                                        - 24 -

[*24] On February 18, 2005, the IRS issued multiple notices of deficiency relating

to SCC’s short tax year ended May 31, 2001. On May 25, 2005, the Shockleys

filed a petition in response to the notice that was sent to them at their then home

address in Wisconsin. On April 26, 2007, that case at docket No. 9699-05 was

dismissed for lack of jurisdiction because SCC lacked legal capacity to proceed in

the case through the Shockleys. On September 6, 2007, the IRS assessed the

following amounts against SCC for the tax year ended May 31, 2001:

(1) corporate income tax of $41,566,515; (2) an addition to tax under section

6651(a)(1) of $2,078,276; (3) an accuracy-related penalty under section 6662 of

$8,313,303; and (4) interest of $26,953,309.60. Thereafter, the IRS undertook

transferee examinations of eight of the largest SCC shareholders who sold their

SCC shares to NCAC on May 31, 2001, including petitioners. The IRS sent to

petitioners transferee notice of liability statements on August 21, 2008.

                                     OPINION

      Respondent’s theory of these cases is that SCC was liable for Federal

income tax related to its appreciated assets sold in 2001 and that petitioners are

each liable for a portion of that unpaid tax because they received transfers from

SCC. To reach this outcome, respondent seeks to disregard the overall ICA

transaction so that petitioners would be deemed to have received distributions
                                         - 25 -

[*25] from SCC rather than having received consideration for their stock from

NCAC. Respondent also seeks to collect the tax from petitioners through the

procedural provisions of section 6901.

      Section 6901 addresses transferee liability and provides that the liability, at

law or in equity, of a transferee of property of a taxpayer owing Federal income

tax “shall * * * be assessed, paid, and collected in the same manner and subject to

the same provisions and limitations as in the case of the taxes with respect to

which the liabilities were incurred”. Sec. 6901(a). Transferee liability under

section 6901 includes related additions to tax, penalties, and interest owed by the

transferor. Kreps v. Commissioner, 42 T.C. 660, 670 (1964), aff’d, 351 F.2d 1 (2d

Cir. 1965). This Court has jurisdiction over transferee liability. See secs. 6901(f),

6902(a) and (b); Rule 13(a).

      Section 6901 does not independently impose tax liability upon a transferee

but merely provides a procedure through which the IRS may collect unpaid taxes--

owed by a transferor of assets--from the transferee who received those assets.

Commissioner v. Stern, 357 U.S. 39, 42 (1958) (addressing section 311 of the

Internal Revenue Code of 1939, the predecessor of today’s section 6901). Thus an

independent basis for liability must be available, and this basis is generally found
                                        - 26 -

[*26] under applicable State law or equity principles. Sec. 6901(a)(1)(A);

Ginsberg v. Commissioner, 305 F.2d 664, 667 (2d Cir. 1962), aff’g 35 T.C. 1148

(1961).

      Accordingly, three requirements must be met for the Commissioner to

assess transferee liability against a party under section 6901: (1) the party must be

subject to liability under applicable State law or equity principles; (2) the party

must be a transferee under section 6901 pursuant to Federal tax law principles; and

(3) the transferor must be liable for the unpaid tax. Swords Trust v.

Commissioner, 142 T.C. 317, 336 (2014); see Cullifer v. Commissioner, T.C.

Memo. 2014-208, at *42. The Commissioner bears the burden of proving that a

party is liable as a transferee of the taxpayer’s property but not of proving that the

taxpayer is liable for the tax. See secs. 6902(a), 7454(c); Rule 142(d).

      Respondent initially argues that the threshold question of whether

petitioners are transferees under section 6901 must precede and control any

analysis of State law liability. Respondent insists that this analytical hierarchy

allows for petitioners to be first properly designated as transferees. Only after this

designation is established, respondent asserts, should liability under State law be

addressed with petitioners already having been identified as transferees.
                                       - 27 -

[*27] In response to this same argument made in other cases, this Court and the

Courts of Appeals for the First, Second, Fourth, Seventh, and Ninth Circuits have

all ruled that these two elements stand independent of each other and that any

disregard of entities or transactions determined under the Federal transferee

requirement would have to be determined separately under the State liability

requirement. See Feldman v. Commissioner, 779 F.3d at 458; Salus Mundi

Found. v. Commissioner, 776 F.3d 1010, 1012 (9th Cir. 2014), rev’g and

remanding T.C. Memo. 2012-61; Diebold Found., Inc. v. Commissioner, 736 F.3d

172, 185 (2d Cir. 2013), vacating and remanding Salus Mundi Found. v.

Commissioner, T.C. Memo. 2012-61; Frank Sawyer Trust of May 1992 v.

Commissioner, 712 F.3d 597, 605 (1st Cir. 2013), rev’g and remanding T.C.

Memo. 2011-298; Starnes v. Commissioner, 680 F.3d 417, 429 (4th Cir. 2012),

aff’g T.C. Memo. 2011-63; Swords Trust v. Commissioner, 142 T.C. at 338.

Respondent presents no new argument that would cause a different outcome here.

Thus, we first examine the State liability requirement independent of the Federal

transferee requirement.

State Liability Requirement

      As the transactions took place in Wisconsin, we use Wisconsin State law to

determine whether petitioners are liable, as transferees, for the unpaid tax of SCC.
                                       - 28 -

[*28] See Commissioner v. Stern, 357 U.S. at 45. Wisconsin has adopted the

Uniform Fraudulent Transfer Act, codified at chapter 242 of the Wisconsin

Statutes. See Wis. Stat. secs. 242.01 to 242.11 (2000) (collectively, WIUFTA).

WIUFTA defines “transfer” very broadly as “every mode, direct or indirect,

absolute or conditional, voluntary or involuntary, of disposing of or parting with

an asset or an interest in an asset, and includes payment of money, release, lease

and creation of a lien or other encumbrance.” Id. sec. 242.01(12). Where a debtor

transfers property to a transferee and thereby avoids creditor claims, WIUFTA

provides creditors with certain remedies against the transferee. See id. sec.

242.07; see also id. sec. 242.01(3) (providing that “claim” means “a right to

payment, whether or not the right is reduced to judgment, liquidated, unliquidated,

fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable,

secured or unsecured”), (4) (defining “creditor” as a person who has a claim),

(6) (defining “debtor” as a person who is liable on a claim). The Wisconsin

Supreme Court has affirmed that WIUFTA reflects a strong desire to protect

creditors. See Badger State Bank v. Taylor, 688 N.W.2d 439, 448 (Wis. 2004).

      Under WIUFTA, creditors, such as respondent, have the burden to prove the

elements of transferee liability by clear and convincing evidence. See Kaiser v.

Wood Cnty. Nat’l Bank & Trust Co. (In re Loyal Cheese Co.), 969 F.2d 515, 518
                                        - 29 -

[*29] (7th Cir. 1992); Mann v. Hanil Bank, 920 F. Supp. 944, 950 (E.D. Wis.

1996). Respondent argues that petitioners are liable under both sections

242.04(1)(a) and 242.05(1) of the Wisconsin Statutes. We first consider section

242.05(1) of the Wisconsin Statutes, which provides:

             (1) A transfer made or obligation incurred by a debtor is
      fraudulent as to a creditor whose claim arose before the transfer was
      made or the obligation was incurred if the debtor made the transfer or
      incurred the obligation without receiving a reasonably equivalent
      value in exchange for the transfer or obligation and the debtor was
      insolvent at the time or the debtor became insolvent as a result of the
      transfer or obligation.

      Under this section, any transfer must be viewed exclusively from the

perspective of the creditor--the degree of knowledge or beliefs or good faith of the

putative transferees regarding the nature of the transfer are not relevant to analysis.

See Badger State Bank, 688 N.W.2d at 449 (“The transferee’s subjective state of

mind does not play a role in resolving the present case under Wis. Stat.

§ 242.05(1).”). Thus, section 242.05(1) of the Wisconsin Statutes serves as a

constructive fraud provision focusing on an objective result, meaning that there is

no requirement that transferees be guilty of any fraud. Badger State Bank, 688

N.W.2d at 447.

      For WIUFTA to apply at all, however, a transfer of some kind must have

been made from SCC (the transferor) to petitioners (the transferees). Respondent
                                         - 30 -

[*30] argues that although the Midco transaction was papered as a sale of SCC’s

stock, the actual substance of the transaction was an asset sale and liquidation of

SCC. By relying on the judicial doctrine of “substance over form”, respondent

seeks to recast the transaction in this vein by disregarding the comprehensive

Midco transaction. Once it is disregarded, respondent asserts, SCC would be

deemed to have liquidated its highly appreciated assets and transferred the

proceeds to its shareholders, including petitioners.

      Petitioners argue that SCC transferred nothing to them and that respondent

bears the burden of proving each element of section 242.05(1) of the Wisconsin

Statutes without relying on “substance over form” or related theories to recast the

transactions that occurred. They contend that “[t]here is no support in Wisconsin

law for fabricating a transfer to Petitioners or treating Petitioners’ sale of their

SCC stock as anything other than a stock sale.” They assert, correctly, that

respondent cannot be placed in a better position than any other creditor under

Wisconsin law. See Stern v. Commissioner, 357 U.S. at 47 (“The Government’s

substantive rights in this [transferee liability] case are precisely those which other

creditors would have under * * * [State] law.”). Ultimately, petitioners argue that

they are not liable to creditors of SCC under Wisconsin law and, as a result,

cannot be liable to respondent as transferees.
                                        - 31 -

[*31] The Court of Appeals for the Seventh Circuit has recently addressed

transferee liability under WIUFTA and specifically expressed that “state

fraudulent-transfer law is itself flexible and looks to equitable principles like

‘substance over form,’ just like the federal tax doctrines”. Feldman v.

Commissioner, 779 F.3d at 459. The Court of Appeals instructed that “Wisconsin

has long followed the general rule that ‘[e]quity looks to substance and not to

form’” and noted that WIUFTA explicitly incorporates equitable principles under

section 242.10 of the Wisconsin Statutes. Id. (quoting Cunneen v. Kalscheuer,

206 N.W. 917, 918 (Wis. 1926), which also declared that equity “is loath to lend

itself to the accomplishment of a purpose different from that which the transaction

usually imports.”); see Wis. Stat. sec. 242.10 (“Unless displaced by this chapter,

the principles of law and equity * * * supplement this chapter.”). Although

Wisconsin courts mostly apply the substance over form principle with little

detailed analysis, it appears they use the doctrine in the same manner as Federal

courts. See, e.g., Wis. Dep’t of Revenue v. River City Refuse Removal, Inc., 712

N.W.2d 351, 363 n.19 (Wis. Ct. App. 2006) (noting that the substance over form

principle governs the treatment of a taxpayer’s activities and transactions for tax

purposes while relying on Miller v. Tax Comm’n of Wisconsin, 217 N.W. 568,

569 (1928), which cites United States v. Phellis, 257 U.S. 156, 168 (1921), for the
                                       - 32 -

[*32] proposition that courts will look beyond the mere form to the substance of a

transaction for the purpose of ascertaining its true nature), aff’d, 729 N.W.2d 396

(Wis. 2007).

      The Court of Appeals also made clear that subjective intent and good faith

play no role in the application of WIUFTA’s constructive fraud provisions.

Feldman v. Commissioner, 779 F.3d at 459. Thus, a transferee’s reliance on her or

his “due diligence and lack of knowledge of illegality is simply beside the point.”

Id. at 459-460. Guided by the Court of Appeals’ interpretation of Wisconsin law,

we look to the substance of the overall transaction.

      Generally, courts respect the form of a transaction and will apply the

substance over form doctrine only when warranted. John Hancock Life Ins. Co.

(U.S.A.) v. Commissioner, 141 T.C. 1, 57 (2013). Taxpayers have the legal right

to minimize or avoid their taxes by any means which the law permits. Gregory v.

Helvering, 293 U.S. 465, 469 (1935); see Blueberry Land Co. v. Commissioner,

361 F.2d 93, 100 (5th Cir. 1966), aff’g 42 T.C. 1137 (1964).

      This right, however, does not allow the taxpayer “to structure a paper entity

to avoid tax when that entity * * * [has no] economic reality”. Markosian v.

Commissioner, 73 T.C. 1235, 1241 (1980). When the form of the transaction has

not actually altered any cognizable economic relationships, the Court will look
                                        - 33 -

[*33] through that form and apply the tax law according to the substance of the

transaction. See id.; see also Frank Lyon Co. v. United States, 435 U.S. 561, 573

(1978); Gregory v. Helvering, 293 U.S. at 469-470; Ocmulgee Fields, Inc. v.

Commisssioner, 613 F.3d 1360, 1368-1369 (11th Cir. 2010), aff’g 132 T.C. 105

(2009); Crosby v. United States, 496 F.2d 1384, 1389 (5th Cir. 1974) (“‘[I]t is the

underlying essence of a transaction that determines its taxability.’” (quoting Int’l

Trading Co. v. Commissioner, 275 F.2d 578, 583 (7th Cir. 1960), aff’g T.C.

Memo. 1958-104)). Ultimately, “substance prevails over form” and sham entities

and transactions with no economic substance are disregarded for Federal tax law

purposes. Superior Trading, LLC v. Commissioner, 728 F.3d 676, 680-681 (7th

Cir. 2013), aff’g 137 T.C. 70 (2011); accord Kirchman v. Commissioner, 862 F.2d

1486, 1492 (11th Cir. 1989), aff’g Glass v. Commissioner, 87 T.C. 1087 (1986).

      Petitioners contend that the form of the transaction must be respected:

NCAC, an unrelated party, purchased petitioners’ stock in SCC, a solvent

company with significant operating assets and no tax liabilities, by using cash

proceeds obtained through a loan from a third-party financial institution. At that

point, NCAC allegedly became the sole shareholder of SCC for all purposes.

Thus, petitioners maintain that they received nothing from SCC and therefore

cannot be transferees.
                                         - 34 -

[*34] The Court of Appeals in Diebold summarized Midco transactions as

follows:

             “Midco transactions” or “intermediary transactions” are
      structured to allow the parties to have it both ways: letting the seller
      engage in a stock sale and the buyer engage in an asset purchase. In
      such a transaction, the selling shareholders sell their C Corp stock to
      an intermediary entity (or “Midco”) at a purchase price that does not
      discount for the built-in gain tax liability, as a stock sale to the
      ultimate purchaser would. The Midco then sells the assets of the C
      Corp to the buyer, who gets a purchase price basis in the assets. The
      Midco keeps the difference between the asset sale price and the stock
      purchase price as its fee. The Midco’s willingness to allow both
      buyer and seller to avoid the tax consequences inherent in holding
      appreciated assets in a C Corp is based on a claimed tax-exempt
      status or supposed tax attributes, such as losses, that allow it to
      absorb the built-in gain tax liability. * * * If these tax attributes of the
      Midco prove to be artificial, then the tax liability created by the
      built-in gain on the sold assets still needs to be paid. In many
      instances, the Midco is a newly formed entity created for the sole
      purpose of facilitating such a transaction, without other income or
      assets and thus likely to be judgment-proof. The IRS must then seek
      payment from the other parties involved in the transaction in order to
      satisfy the tax liability the transaction was created to avoid.

Diebold Found., Inc. v. Commissioner, 736 F.3d at 175-176 (citing Notice 2001-

16, supra).

      At the time of the relevant events, petitioner and others referred to the

overall transaction as a Midco. Independent of those references, we nonetheless

determine that the transaction in issue substantially shares the Midco features

described in Diebold.
                                        - 35 -

[*35] While the Shockleys testified that neither they nor SCC ever hired ICA, the

SCC board nevertheless made a decision in September 2000 to sell SCC’s stock to

an affiliate of ICA. No ICA “affiliate” existed to hire ICA at that time; thus the

SCC board agreed, tacitly or otherwise, to permit ICA to act as an intermediary of

a “buy SCC stock/sell SCC assets” transaction. The SCC board wanted ICA’s

services because the SCC shareholders could avoid the unwanted tax results of an

appreciated asset sale and enjoy the sought-after tax savings of a stock sale--

something it was unable to obtain before working with ICA. Over two months

after the SCC board’s decision, ICA created the stock purchaser, NCAC, which

appears to have had no initial assets or any income-producing purpose of its own

and was capitalized by ICA only when its lack of finances was questioned by the

SCC board.

      ICA also generated other shell entities: NCA LLC, NCS Trust, NC

Holdings, SDC, and SCA LLC, as well as NC Fund to fund the unfunded NCAC.

ICA then used this labyrinthine array to bring about a three-hour program of

reorganizations, name changes, and restructurings, all for the ultimate result of a

two-member LLC (one member being an Isle of Man entity) that was created for

no other explained reason than to avoid the tax consequences of the sales of SCC’s

assets.
                                        - 36 -

[*36] Although no witness was called upon to explain the detailed mechanics of

the transaction, we can infer--on the basis of the opinion letter--that the anticipated

tax-avoidance purpose of the overall (and abstruse) ICA transaction was chiefly as

follows: Because NCAC wholly owned SCA LLC and thus became the sole

member when SDC converted into SCA LLC, a result of no recognized gain by

NCAC under section 332(a) or by SCA LLC under section 337(a) would occur.

NCAC would then take a tax basis in the assets of SCA LLC equal to the basis of

such assets in SDC’s hands immediately prior to the conversion under section

334(b). In the instant between the SDC/SCA LLC conversion and the taking on of

its new 1% member, SCA LLC would be disregarded for Federal income tax

purposes as an entity separate from NCAC, its sole owner, with the result that the

assets formerly owned by SCC would be treated as owned by NCAC. When Hare

Street Trading, L.P., became its 1% member, SCA LLC could then be classified as

a partnership for Federal income tax purposes. Jumping to section 752(a), 99% of

the principal amount of the UAFC loan (now a partnership liability) would then be

treated as a contribution of money by NCAC to SCA LLC, thus increasing

NCAC’s basis in its partnership interest under section 722. The merger of NCAC

into NC Holdings would cause a section 708 termination of SCA LLC, and then

the $129,250,000 basis of the preferred stock in the hands of SCA LLC would be
                                        - 37 -

[*37] shifted to the basis of all of SCA LLC’s other assets by making a section

754 election for its tax year 2001. Similar to the SDC conversion, the liquidation

of NCAC through its merger into NC Holdings would result in no gain having to

be recognized by NC Holdings under section 332(a) or by NCAC under section

337(a). NC Holdings would take a tax basis in the assets of NCAC equal to the

basis in NCAC’s hands immediately prior to the liquidation under section 334(b).

Although not stated in the legal opinion, it appears that NC Holdings’ name was

changed--even though it was the surviving entity of the merger--because of the

remaining contracts requiring “Northern Communications Acquisition

Corporation” as a party.

      While the tax attributes of this scheme occurred during the overall

transaction as opposed to having already been established before the transaction

(such as a Midco’s use of offsetting losses or tax-exempt status as described in the

Diebold excerpt), we nonetheless conclude that these attributes serve the same

sole purpose of tax avoidance. The record reflects no other apparent reason for

ICA to have created this many transactional entities and to have assumed this

structuring other than the aspiration to reach an unwarranted tax result, i.e., SCC’s

appreciated assets having been sold without any correlating tax liability to SCC,

SDC, SCA LLC, NCAC II, ICA, the SCC shareholders, or anyone else.
                                         - 38 -

[*38] This manipulating of the Internal Revenue Code is a prime example of how

a transaction can be structured so that its form might meet the letter of the law, but

it nevertheless is being used in a manner incongruous with the intent of that law.

See Commissioner v. Court Holding Co., 324 U.S. 331, 334 (1945) (“To permit

the true nature of a transaction to be disguised by mere formalisms, which exist

solely to alter tax liabilities, would seriously impair the effective administration of

the tax policies of Congress.”); Gregory v. Helvering, 293 U.S. 465, 470 (1935)

(holding that where a transaction on its face lies outside the plain intent of a

statute, the general premise--that taxpayers have the right to avoid their taxes by

whatever means allowed by law--does not apply and that “[t]o hold otherwise

would be to exalt artifice above reality and to deprive the statutory provision in

question of all serious purpose”).

      With respect to third-party funding, ICA structured the overall transaction to

have the sale of stock occur just before the sales of the assets (similar to the Midco

transaction described in Diebold). This positioning made third-party funding

through Rabobank and UAFC appear to be necessary. An added twist with this

particular transaction was that the loan was actually necessary to accomplish an

increase in NCAC’s basis in its partnership interest that went towards the

scheme’s elimination of tax arising from the asset sales.
                                         - 39 -

[*39] In form, NCAC used funds other than those from the sales of the SCC assets

to purchase the SCC stock, thus further distancing the transaction from resembling

a direct asset sale. In substance, however, there seems to be no true nontax reason

for having taken this measure. The “form” ignores that Rabobank entered into the

loan agreement because it would be fully secured by the pledged escrow I account

that held funds deposited by QNI in excess of the loan (and because it would get a

$750,000 fee). In effect the assets purchaser QNI guaranteed the stock loan at all

times (regardless of whatever additional security Ohlrich pledged) so that

petitioners could be paid in advance of the asset sales.

      Petitioners also distanced themselves from having any connection with the

only company of substance of all the ICA entities--ICA itself. The Shockleys

testified that they did not hire ICA for any purpose, and petitioner testified that if

anybody hired ICA it would have been “Northern”. Yet none of the “Northern”-

named entities had even been created before the day that ICA received the October

6, 2000, QNI letter of intent to buy the SCC assets. By having minimized their

association with ICA, petitioners have excluded the only real party aside from the

buyers that could have possibly made the transaction a bona fide multiple-party

transaction.
                                        - 40 -

[*40] While there are some gaps in the record (e.g., whether ICA actually received

a fee and in what amount), these unresolved areas can be explained by the

clandestine measures the Midco transaction took (e.g., instructions not to leave a

paper trail mentioning ICA’s fee). These gaps do not deny us the ability to draw

reasonable inferences from the available evidence, such as ICA’s having received

a fee for its services from the approximately $60 million difference between the

proceeds of the asset sales (according to the QNI APA and the TSTT APA), and

the cost of the stock (according to the SPA). See Owens v. Commissioner, 64 T.C.

1, 15 (1975), aff’d in part, rev’d in part on other grounds, 568 F.2d 1233 (6th Cir.

1977).

      Thus, looking to the objective economic realities of the transaction, the

evidence and reasonable inferences therefrom sufficiently establish that the true

substance of the transaction is different from its form--that the only purpose of the

ICA Midco transaction was tax avoidance. See Frank Lyon Co., 435 U.S. at 573;

Harris v. Commissioner, 61 T.C. 770, 783 (1974). This conclusion is reached

regardless of whether petitioners entered into the transaction in good faith,

whether they had no knowledge of ICA’s overall scheme, or whether they did not

know that SCC would have an unpaid tax liability. See Feldman v. Commissioner,

779 F.3d at 459-460. The Midco transaction is therefore disregarded. As a result,
                                       - 41 -

[*41] petitioners are deemed not to have received consideration for their stock

from NCAC but, instead, to have received distributions from SCC pursuant to its

de facto liquidation. See Feldman v. Commissioner, T.C. Memo. 2011-297, slip

op. at 35.

      Petitioners counter this conclusion by arguing that the form of the overall

transaction should be respected pursuant to the economic substance doctrine.

They assert that their sale of SCC stock to NCAC had substantive economic

effects on the parties and legitimate business purposes.

      Wisconsin courts have mentioned the economic substance of transactions

but without having expressed analysis in any detail. See, e.g., Sullivan Bros. v.

Wis. Dep’t of Revenue, No. 2013AP818, 2014 WL 321867 (Wis. Ct. App. Jan. 30,

2014) (reviewing the judgment of a circuit court that had affirmed a decision of

the Wisconsin Tax Appeals Commission, which had determined that the

taxpayer’s transactions lacked economic substance). The Court of Appeals for the

Eleventh Circuit has conveyed that the “economic-substance doctrine, also called

the sham-transaction doctrine, provides that a transaction ceases to merit tax

respect when it has no ‘economic effects other than the creation of tax benefits.’

* * * Even if the transaction has economic effects, it must be disregarded if it has

no business purpose and its motive is tax avoidance.” United Parcel Serv. of Am.,
                                        - 42 -

[*42] Inc. v. Commissioner, 254 F.3d 1014, 1018 (11th Cir. 2001) (citation

omitted) (quoting Kirchman v. Commissioner, 862 F.2d at 1492), rev’g T.C.

Memo. 1999-268. Accordingly, a flexible analysis--focusing on the two factors of

economic substance and business purpose--may be used to determine whether a

transaction (or series of related transactions) constitutes a substantive sham.

Winn-Dixie Stores, Inc. v. Commissioner, 113 T.C. 254, 279-280 (1999), aff’d,

254 F.3d 1313 (11th Cir. 2001). Economic substance is thus determined by an

“objective evaluation of changes in economic position of the taxpayer (economic

effects) aside from tax benefits”, and by a subjective analysis of the taxpayer’s

intent as to whether there was a legitimate business purpose for entering in the

transaction. Id. at 280.

      An objective evaluation of economic substance depends on whether “the

transaction was likely to produce economic benefits aside from tax deductions” to

the taxpayer. Id. at 280, 285; see Kirchman v. Commissioner, 862 F.2d at 1492.

The kind of “economic effects” that entitles a transaction to be regarded for tax

purposes includes the creation of genuine obligations enforceable by an unrelated

party. United Parcel Serv. of Am., Inc. v. Commissioner, 254 F.3d at 1018 (citing

Frank Lyon Co., 435 U.S. at 582-583).
                                        - 43 -

[*43] Petitioners pose several arguments that the sale of their SCC stock created

genuine obligations, thus real economic effects, with regard to themselves and the

ICA entities. As some examples, they point to the shifting of ownership rights

between the SCC shareholders and NCAC, as well as SCA LLC’s having owned

the radio stations for four months and its inherent responsibility for any violation

of FCC rules during that time. The economic substance doctrine, however, does

not look at the economic effects of the transaction on its parties or on the putative

transferees--but on the taxpayer. The taxpayer here is SCC, not petitioners; and

while its economic position definitely changed because of the transaction (having

had its assets of approximately $178 million reduced to zero in scant hours), the

record shows no nontax economic benefits having been received by SCC.

      Considering the Midco transaction as a whole, we conclude that its only

function was to produce tax effects that eliminated SCC’s income tax liabilities.

Without the tax-avoidance aspects, the plan provided no benefit to SCC and,

therefore, lacked economic substance apart from its tax objective.

      The economic substance doctrine also takes into consideration whether the

taxpayer had a legitimate, non-tax-avoidance business purpose in entering into the

transaction. Kirchman v. Commissioner, 862 F.2d at 1492-1493 (applying the

sham transaction doctrine). But compare id. at 1492 (“It is clear that transactions
                                        - 44 -

[*44] whose sole function is to produce tax deductions are substantive shams,

regardless of the motive of the taxpayer.”) and United Parcel Serv. of Am., Inc. v.

Commissioner, 254 F.3d at 1018 n.2 (“Kirchman, which is binding in this circuit,

* * * explicitly refuses to examine subjective intent if the transaction lacks

economic effects.”), with United Parcel Serv. of Am., Inc. v. Commissioner, 254

F.3d at 1018 (citing Karr v. Commissioner, 924 F.2d 1018, 1023 (11th Cir. 1991)

for “noting that subjective intent is not irrelevant, despite Kirchman’s statement of

the doctrine”). In Winn-Dixie, the Court addressed the business purposes of a

taxpayer after having determined that the transactions in issue lacked economic

substance apart from tax considerations. See Winn-Dixie Stores, Inc. v.

Commissioner, 113 T.C. at 285. In the Winn-Dixie appeal, the Court of Appeals

for the Eleventh Circuit affirmed without comment as to the Court’s inclusion of a

business purpose analysis. See generally Winn-Dixie Stores, Inc. v.

Commissioner, 254 F.3d 1313. On the side of caution, we follow Winn Dixie and

review the business purpose factor even though we have determined that the

transaction had no economic substance.

      The inquiry into whether there was a legitimate business purpose involves a

subjective analysis of the taxpayer’s intent. See Winn-Dixie Stores, Inc. v.

Commissioner, 113 T.C. at 280. A transaction entered into by a “going concern”
                                        - 45 -

[*45] has a business purpose “as long as it figures in a bona fide, profit-seeking

business.” United Parcel Serv. of Am., Inc. v. Commissioner, 254 F.3d at 1019.

      Petitioners assert a few nontax business purposes for their having

participated in the transaction, such as maximizing the return on their investment

in SCC before retiring, avoiding the emotional difficulty involved in breaking up

the company over time instead of all at once, and allegedly lacking any choice in

the matter because the SCC board decided to pursue the stock sale. Again,

petitioners’ purposes are immaterial because we are looking to the business

purposes of the taxpayer. As the taxpayer is SCC, the business purposes of the

SCC board are determinative.

      Petitioners ascribe only one potential business purpose to the SCC board’s

decision to enter into the transaction: its wanting to pursue a stock sale because of

the greater return on investment to shareholders than that from an asset sale. The

reason for the greater net after-tax proceeds from a stock sale, however, was

essentially the avoided tax on the built-in gains of SCC’s appreciated assets.

Thus, this business purpose is directly related to the tax-avoidance objective.

      Though not attributed to the SCC board, a possible business purpose could

have been the effect on employee morale from the piecemeal selling of SCC to

several different buyers over time. Petitioners describe a legitimate business
                                       - 46 -

[*46] concern of the impact on employee retention and possible decrease in

productivity under these circumstances.

      If the SCC board was concerned about the “breaking up” of SCC, however,

it nevertheless submitted to the overall transaction with the knowledge that this

exact result would occur. At a minimum the SCC board, in whole or in part, knew

that ICA would split up the television assets, as the Shockleys (through TSTT/SB

LLC) were one of the buyers; and it knew that the radio assets would not be sold

at the same time as the television assets (and subsequently knew that the radio

assets would sell four months after the sales of the television assets). While a

business purpose may still be valid even if its desired result does not come to pass,

in this instance the SCC board was not shown to have held this proposed purpose

or to have made any attempt to achieve it.

      In addition, the overall transaction nullified SCC as a “going concern” by

having it merged out of existence. Consequently, SCC, through the SCC board,

had no genuine business purpose with regard to the Midco transaction other than

Federal income tax savings.

      Petitioners also raise arguments under more substance-over-form-related

doctrines, namely the conduit theory and the step transaction doctrine. Having

already concluded that the transaction was a sham under a substance over form
                                         - 47 -

[*47] analysis as supported by an economic substance analysis, we need not

consider these additional doctrines.

      We conclude that the overall Midco transaction was a sham because it was

not a true multiple-party transaction, lacked economic substance, had no business

purpose, and was only entered to avoid tax. Cf. Frank Lyon Co., 435 U.S. at

583-584 (determining that where there is a “genuine multiple-party transaction

with economic substance”, compelled by business realities, imbued with

tax-independent considerations, and not shaped solely by tax-avoidance features

with meaningless labels, the Government should honor the intent of the parties).

In keeping with the substance of the transaction, SCC is therefore deemed to have

sold all its assets, incurred the inherent taxable capital gains, liquidated, and

distributed parts of the proceeds from its asset sales to petitioners. In the light of

WIUFTA’s broad definition of “transfer”, transfers are deemed to have been made

from SCC to petitioners. See Wis. Stat. secs. 242.01(12), 242.06; Feldman v.

Commissioner, 779 F.3d at 458-459.

      Having established that transfers are deemed to have occurred, we now

consider whether petitioners are liable under section 242.05(1) of the Wisconsin

Statutes. A creditor pursuing a claim under section 242.05(1) of the Wisconsin

Statutes must satisfy three requirements: “(1) the creditor’s claim arose before the
                                         - 48 -

[*48] transfer was made; (2) the debtor made the transfer without receiving a

reasonably equivalent value in exchange for the transfer; and (3) the debtor either

was insolvent at the time of the transfer or became insolvent as a result of the

transfer.” Badger State Bank, 688 N.W.2d at 442.

      With respect to the first requirement, petitioners argue that respondent did

not have a claim at the time they received the funds for their SCC stock. Their

position is based upon the overall Midco transaction having been engineered to

have the stock sale occur an hour or two ahead of the television asset sales.

       Because of the disregarded sham transaction, however, SCC is deemed to

have sold its television assets and radio assets--taxable events that fall within the

definition of a claim under WIUFTA. See Wis. Stat. sec. 242.01(3); see also

Stuart v. Commissioner, 144 T.C. ___, ___ (slip op. at 2) (Apr. 1, 2015), amended

per order, (Apr. 15, 2015) (holding that unmatured tax liabilities are “claims”

within the meaning of that term as defined in the Uniform Fraudulent Transfer

Act); Feldman v. Commissioner, T.C. Memo. 2011-297, slip op. at 36 (“Income

tax liabilities arising from the sale of corporate assets are ‘claims’ existing at the

time of the sale.”). Logically, these deemed sales would have had to occur before

SCC’s being theoretically able to distribute/transfer the resulting proceeds to

petitioners. Cf. Cullifer v. Commissioner, at *41 (citing Notice 2008-111, supra,
                                         - 49 -

[*49] sec. 2, for the premise that the tax mechanics of a Midco transaction remain

the same regardless of the order in which the stock sale and the asset sale occur).

      Petitioners also argue that any Federal tax liability that arose from those

sales could not have accrued until February 15, 2002, the due date of SCC’s

Federal tax return. Petitioners cite Locke v. Commissioner, T.C. Memo. 1996-

541, aff’d without published opinion, 152 F.3d 927 (9th Cir. 1998), as authority.

The Court in Locke did declare that the tax liability of the transferor accrued on

the due date of the return (thus--in the timeframe of that case--before the transfer).

This declaration, however, was reflecting the Commissioner’s argument for that

particular determination in that particular case; it was not a universal

pronouncement. The transferee had conversely argued that the claim arose after

the transfer (thus after the return due date) because no definitive

partnership-related liability had been determined at the time of the transfer

because the post-1984 caselaw that provided the groundwork for such liability had

not yet been determined. Nevertheless--specifically to that case--the Court

determined that the tax liability for that transferor accrued on the due date of the

return as opposed to afterwards. Moreover, as authority for reaching that

determination, the Court cited Swinks v. Commissioner, 51 T.C. 13, 17 (1968),

which held that “[a] transferee is liable retroactively for the transferor’s taxes and
                                         - 50 -

[*50] additions to the tax in the year of the transfer to the extent of assets received

from the transferor, even though the tax liability of the transferor was unknown at

the time of the transfer.” Accordingly, respondent’s claims are deemed to have

arisen before the transfers were made.

      Regarding the second requirement that the transferor did not receive a

reasonably equivalent value in exchange for the transfer, petitioners argue that

they did not receive a transfer from SCC. They also argue that the amount they

did receive from NCAC for their SCC stock was the true value purchase price.

      Whether reasonably equivalent value was received by the transferor is a

question of fact. See Edinger v. Hazelquist, 724 N.W.2d 703, No. 2005AP2955,

2006 WL 2864522, at *2 (Wis. Ct. App. Oct. 10, 2006); see also Feldman v.

Commissioner, T.C. Memo. 2011-297, slip op. at 38. While it does not define

“reasonably equivalent”, WIUFTA provides that “[v]alue is given for a transfer or

an obligation if, in exchange for the transfer or obligation, property is transferred

or an antecedent debt is secured or satisfied”. Wis. Stat. sec. 242.03(1).

      The record reflects that petitioners received distributions of approximately

$26 million (not including loan repayments) from the proceeds of the sales of

SCC’s assets while SCC received nothing (or, at best, received petitioners’ shares

of SCC stock, which--because of the distributions essentially liquidating SCC--
                                         - 51 -

[*51] were worthless). Thus, the deemed transferor SCC did not receive value,

reasonably equivalent or otherwise, in exchange for the proceeds from the sale of

its assets.

       As to the third requirement, whether the debtor became insolvent as a result

of the transfer, petitioners contend that at the time that the SCC shareholders had

sold their stock to NCAC, SCC had assets well in excess of its liabilities.

Petitioners also contend that SCC could not have incurred a tax liability following

its merger with SDC and conversion into SCA LLC.

       A debtor is insolvent if the sum of the debtor’s debts is greater than all of

the debtor’s assets at a fair valuation. Id. sec. 242.02(2). As discussed, the tax on

the sales of the assets was a debt to SCC as of the date of sale, May 31, 2001.

That tax debt would have been approximately $39,488,189. (We arrive at this

amount by attributing 95% of the deficiency of $41,566,515 to the television

assets that accounted for approximately 95% of SCC’s total assets. While

$39,488,189 may not be the actual amount of tax owed on the sales of the

televison assets, it is close enough to illustrate SCC’s economic status.) For our

purposes, the approximate fair market value of SCC’s remaining assets after the

May 31, 2001, sales, i.e., the radio assets, is considered to be their purchase price

of $7.5 million. As a result, SCC’s tax debt was significantly greater than its
                                        - 52 -

[*52] remaining assets as of May 31, 2001. When SCC sold its remaining assets

in September 2001, it would have continued to be insolvent pursuant to section

242.02(2) of the Wisconsin Statutes.

      In summary, we conclude that petitioners are transferees under section

242.05(1) of the Wisconsin Statutes because SCC made transfers to petitioners

and others without having received anything of value in exchange, those transfers

caused SCC to become insolvent, and respondent’s claims arose before the

transfers were made. Because we conclude that petitioners, as transferees, are

liable for SCC’s 2001 tax liability under section 242.05(1) of the Wisconsin

Statutes, we need not consider section 242.04(1)(a) of the Wisconsin Statutes.

Federal Transferee Requirement

      For purposes of section 6901, the term “transferee” includes, inter alia,

donee, heir, legatee, devisee, distributee, and shareholder of a dissolved

corporation. See sec. 6901(h); sec. 301.6901-1(b), Proced. & Admin. Regs. The

principle of substance over form applies to determinations of transferee liability

issues. See generally Scott v. Commissioner, T.C. Memo. 1998-426, aff’d, 236

F.3d 1239 (10th Cir. 2001). In accordance with the substance over form analysis

applied supra, petitioners, as distributees of SCC, are determined to be transferees

pursuant to section 6901.
                                         - 53 -

[*53] Transferor Liability for Unpaid Tax

      In arguing whether SCC actually owed the tax liability for its short tax year

ended May 31, 2001, petitioners rely on the Midco transaction not being

disregarded. They maintain that it was not SCC but SCA LLC that sold the assets

and, therefore, the members of SCA LLC were required to report the gain from the

asset sales and pay the resulting tax.

      Petitioners bear the burden of proof on this matter and offer no alternative

arguments as to SCC’s tax liability. See sec. 6902(a); Rule 142(d). Petitioners

point to nothing in the record that shows that respondent incorrectly determined or

improperly assessed SCC’s tax liability for 2001. As the Midco transaction was

determined to be a sham and all of the ICA-created entities are disregarded, we

conclude that SCC was liable for the unpaid tax for its short tax year ended May

31, 2001.

Collection Efforts Against SCC

      Petitioners allege that respondent cannot impose transferee liability on them

because respondent failed to prove that the IRS was unable to collect from SCC.

They argue that respondent failed to show that the IRS exhausted all efforts to

collect from SCC before proceeding against them. They also claim that SCA LLC
                                        - 54 -

[*54] was directly liable for any of SCC’s debts pursuant to Wisconsin law and

that respondent did not pursue collection from SCA LLC.

         State law determines whether respondent had an obligation to pursue

collection efforts against SCC before proceeding against petitioners. See

Hagaman v. Commissioner, 100 T.C. 180, 183-184 (1993) (“[E]ven with regard to

transferee liability in equity, certain of the elements described in * * * [Gumm v.

Commissioner, 93 T.C. 475, 480 (1989), aff’d without published opinion, 933

F.2d 1014 (9th Cir. 1991), including the element that all reasonable efforts to

collect from the transferor were made and that further collection efforts would be

futile,] frequently are unnecessary under State law.”); Kardash v. Commissioner,

T.C. Memo. 2015-51, at *22-*24. WIUFTA does not require a creditor to pursue

all reasonable collection efforts against the transferor. See Wis. Stat. secs. 242.01

to 242.11. Accordingly, respondent was not required to exhaust collection efforts

against SCC. As to SCA LLC, it is a disregarded entity.

         In reaching our decisions, we have considered all arguments made, and, to

the extent not mentioned, we conclude that they are moot, irrelevant, or without

merit.
                                  - 55 -

[*55] To reflect the foregoing,


                                           Decisions will be entered

                                     for respondent.
