                             T.C. Memo. 2016-115



                        UNITED STATES TAX COURT



           NORMA L. SLONE, TRANSFEREE, ET AL.,1 Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent*



      Docket Nos. 6629-10, 6630-10,               Filed June 13, 2016.
                  6631-10, 6632-10.



      Stephen Edward Silver, Derek Kaczmarek, and Jason M. Silver, for

petitioners.

      John Wayne Duncan, for respondent.



      1
       Cases of the following petitioners are consolidated herewith: Slone Family
GST Trust, UA Dated August 6, 1998, Transferee, D. Jack Roberts, Trustee,
docket No. 6630-10; James C. Slone, Transferee, docket No. 6631-10; and Slone
Revocable Trust, UA Dated September 20, 1994, Transferee, James C. Slone and
Norma L. Slone, Trustees, docket No. 6632-10.
      *
     This opinion supplements our previously filed opinion Slone v.
Commissioner, T.C. Memo. 2012-57.
                                         -2-

[*2]             SUPPLEMENTAL MEMORANDUM OPINION


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

of Appeals for the Ninth Circuit in accordance with its opinion in Slone v.

Commissioner, 810 F.3d 599 (9th Cir. 2015), vacating and remanding T.C. Memo.

2012-57 (Slone I). At our request, the parties filed supplemental briefs in which

they were to address the issues raised by the Court of Appeals. The parties have

agreed that these cases may be decided on remand on the basis of the evidence

submitted at the original trial. Unless otherwise indicated, all section references

are to the Internal Revenue Code in effect for the year at issue, and all Rule

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

                                     Background

       We incorporate herein by this reference the facts that we found in Slone I,

set forth under the heading FINDINGS OF FACT in that opinion. These facts are

based upon the stipulations of fact and this Court’s credibility findings as to each

witness appearing before it. We summarize pertinent facts and portions of our

opinion in Slone I for the benefit of the reader.

       Slone Broadcasting operated several radio stations in Tucson. In 2001 and

2002 Slone Broadcasting was a C corporation with a tax year ending June 30.
                                         -3-

[*3] Slone Broadcasting had two shareholders, the Slone Revocable Trust and the

Slone Family GST Trust (Slone GST Trust). Both trusts were formed pursuant to

the laws of Arizona. James C. Slone and Norma L. Slone were the trustees of the

Slone Revocable Trust and the grantors of the Slone GST Trust, an irrevocable

trust.

         John Barkley was the sole trustee of the Slone GST Trust from its inception.

He is a licensed fiduciary in the State of Arizona. He hires accountants, lawyers,

stockbrokers, and other professionals to aid him in carrying out his duties which

are defined, in these cases, by the documents that established the Slone GST Trust.

He exercises his authority independently from Mr. and Mrs. Slone.

         On July 2, 2001, Slone Broadcasting sold its assets to Citadel Broadcasting

Co. (Citadel) for $45 million, which resulted in an estimated combined Federal

and State income tax liability of approximately $15 million. Mr. Slone’s

accountant, D. Jack Roberts, a certified public accountant with over 30 years of

experience, advised on the accounting aspects of the transaction, and Tom

Chandler, Slone Broadcasting’s attorney, advised on the legal aspects of the

transaction. Neither of the advisers proposed tax strategies to reduce the Federal

and State income taxes resulting from the sale.
                                         -4-

[*4] After the closing of the asset sale, Slone Broadcasting did not conduct any

business. There were no plans to liquidate the corporation at any time, nor were

there any plans to make distributions to its shareholders. On October 15, 2001,

Slone Broadcasting made its first estimated Federal income tax payment of

$3,100,000 to the Internal Revenue Service (IRS) for its tax year ended (TYE)

June 30, 2002.

      Fortrend International, LLC (Fortrend), sent an unsolicited letter and

brochure to Mr. Roberts on June 29, 2001. The letter described Fortrend as a

“private investment/merchant-banking group” seeking opportunities to acquire

corporations in situations where the “assets of the Target Corporation can be

profitably sold and/or leased to one or more purchasers/lessees”. The letter also

stated that Fortrend was able to “structure transactions that help manage or resolve

liabilities at the corporate level”. Mr. Roberts did not review the letter and

company brochure until after the closing of the asset sale.

      On August 8, 2001, Fortrend sent Mr. Roberts a second letter expressing

Fortrend’s continued interest in purchasing Slone Broadcasting’s stock. It

described Fortrend’s relationship with MidCoast Credit Corp. (MidCoast), a

corporation engaged in the business of collecting delinquent credit card debt

acquired from banks. After receiving the second letter, Mr. Roberts informed Mr.
                                        -5-

[*5] Slone, in general, about Fortrend and MidCoast and the proposal to buy Slone

Broadcasting’s stock. Mr. Slone gave Mr. Roberts permission to investigate

further and to proceed if the transaction looked viable. On September 7, 2001,

Fortrend sent a third letter to Mr. Roberts, attaching the Fortrend/MidCoast

business plan together with financial projections.

      Mr. Roberts hired Steven Phillips, a tax attorney, as counsel to advise Mr.

and Mrs. Slone and the Slone Revocable Trust on any Fortrend proposals. Mr.

Phillips was not involved in, and did not provide any legal advice with respect to,

the asset sale. On September 10, 2001, Mr. Phillips met with Mr. Slone to discuss

the proposed transaction. This meeting was Mr. Slone’s only contact with Mr.

Phillips. Mr. Roberts represented Mr. Slone in all other communications with Mr.

Phillips.

      Mr. Roberts provided the Fortrend/MidCoast business plan to Mr. Phillips

for review. Mr. Phillips contacted a broker in the asset recovery business to

inquire about MidCoast’s reputation. The broker informed Mr. Phillips that

MidCoast played an active role in the asset recovery industry and had a reputation

as an aggressive but legitimate collector. Mr. Phillips reviewed the projections in

the Fortrend/MidCoast business plan and concluded that they were reasonable.

The reputations of Fortrend and MidCoast together with those of their attorneys
                                        -6-

[*6] and accountant advisers were good. There was no reason for Mr. Roberts or

Mr. Phillips to suspect any impropriety.

      Mr. Roberts and Mr. Phillips knew that Fortrend had a strategy to reduce the

income tax due as a result of the asset sale. When they asked Fortrend what

actions would be taken to achieve the tax savings, they were told that Fortrend’s

methods could not be disclosed because they were “proprietary”. However,

Fortrend represented that Berlinetta, Inc. (Berlinetta), an entity created by Fortrend

that would acquire the shares, had not engaged in any transaction that would be

deemed a “listed transaction” pursuant to Notice 2001-51, 2001-2 C.B. 190. Mr.

Phillips negotiated an increase in the purchase price for the stock based upon what

he described as a “premium” payment resulting from the tax savings that

Berlinetta anticipated. When negotiations concluded, the parties agreed to a

purchase price of $35,753,000 plus Berlinetta’s assumption of Slone

Broadcasting’s Federal and State income taxes owed as of the closing date.

      As trustee of the Slone GST Trust, Mr. Barkley hired Greg Gadarian,

another tax attorney independent from Mr. Phillips, to advise the Slone GST Trust

with respect to any Fortrend proposals. On November 21, 2001, Mr. Phillips

wrote a memorandum describing Fortrend’s plan to offset the gains from the asset

sale by contributing high basis/low value assets to Berlinetta in a section 351
                                        -7-

[*7] transaction and selling those assets at a loss before the end of 2001. The

memorandum also provided a legal analysis of the transferee liability

considerations facing Slone Broadcasting’s shareholders and concluded that they

would not be exposed to such liability. Mr. Gadarian reviewed Mr. Phillips’

memorandum and performed his own research. Mr. Gadarian agreed with Mr.

Phillips’ conclusions. Mr. Gadarian had no reason to think that the stock sale

transaction was other than a legitimate sale. He therefore orally advised Mr.

Barkley that there were no material legal obstacles to the proposed transaction.

Soon after, Mr. Barkley approved the transaction on behalf of the Slone GST

Trust. Both Mr. Phillips and Mr. Gadarian were aware of Notice 2001-16, 2001-1

C.B. 730, and both concluded that it did not apply.

      On December 3, 2001, Mr. Phillips informed Mr. Roberts that there were no

legal obstacles to proceeding. Mr. Roberts advised Mr. Slone that both Mr.

Phillips and Mr. Gadarian had analyzed the legal implications of the transaction

and concluded that it could proceed.

      On December 10, 2001, Slone Broadcasting entered into the stock sale

agreement with Berlinetta. Slone Broadcasting had no involvement in the

financing. The stock sale agreement restricted the use of funds held in Slone

Broadcasting’s bank account until 10 days after the closing date.
                                         -8-

[*8] At the stock sale closing the Slone Revocable Trust and the Slone GST

Trust received $30,819,544 and $2,550,456 in cash, respectively. Mr. Slone and

his children resigned as the officers and directors of Slone Broadcasting. Slone

Broadcasting did not make any distributions to its shareholders between the

closing date of the asset sale and the closing date of the stock sale. After the stock

sale was closed petitioners had no knowledge or say in the operation of Slone

Broadcasting.

      Two days after the closing of the stock sale, on December 12, 2001, Slone

Broadcasting merged with Berlinetta, with Slone Broadcasting as the surviving

corporation. Because the right to use the name “Slone Broadcasting” was not part

of the sale, on January 17, 2002, Slone Broadcasting changed its name to Arizona

Media.

      The IRS began its examination of Arizona Media’s TYE June 30, 2002, in

March 2005. On April 14, 2008, Arizona Media submitted Form 870-AD, Offer

to Waive Restrictions on Assessment and Collection of Tax Deficiency and to

Accept Overassessment, to the IRS, accepting a deficiency for its TYE June 30,

2002. Arizona Media failed to pay the assessed tax, penalty, and interest. No

moneys were ever collected from Arizona Media. On August 28, 2009, Arizona
                                            -9-

[*9] Media was administratively dissolved for failure to file its annual report with

the State of Arizona.

      On December 22, 2009, respondent issued transferee liability notices to the

Slone Revocable Trust and the Slone GST Trust, determining that the trusts were

liable for $16,193,881 and $2,550,832, respectively, plus interest, as transferees of

assets, for the unpaid liability of Arizona Media for its TYE June 30, 2002.

Additionally, respondent issued separate transferee liability notices to Mr. and

Mrs. Slone individually, determining each liable under a transferee liability theory

for $16,193,881, plus interest, for the unpaid liability of Arizona Media.

Petitioners timely filed their petitions.

      In Slone I we determined that the stock sale was a legitimate transaction and

that the form of the transaction must be respected such that petitioners were not

transferees under section 6901 for Federal tax purposes. Therefore, we

determined that petitioners were not liable for the income tax liability accepted by

Arizona Media on April 14, 2008.

                                      Discussion

      The Court of Appeals remanded these cases to us in order for us to make

necessary findings to apply the test set forth in Commissioner v. Stern, 357 U.S.

39 (1958). Stern requires the satisfaction of a two-pronged test in order for a tax
                                        - 10 -

[*10] liability to be imposed on a transferee pursuant to section 6901. Id. at 44-

45. The first prong is satisfied if the party is a “transferee” under section 6901 and

Federal tax law. The second prong is satisfied if the party is “substantively liable

for the transferor’s unpaid taxes under state law”. Salus Mundi Found. v.

Commissioner, 776 F.3d 1010, 1018 (9th Cir. 2014), rev’g and remanding T.C.

Memo. 2012-61. Both prongs must be satisfied in order for liability to be imposed

on a transferee. See Commissioner v. Stern, 357 U.S. at 44-45. Respondent has

the burden of proving that petitioners are liable as transferees, but he does not

have the burden of proving that the taxpayer is liable for the tax. See sec. 6902(a);

Rule 142(d).

      On remand, the Court of Appeals instructed this Court to apply the tests set

out in Stern, stating:

      Under the first prong of this test, the tax court should apply the
      relevant subjective and objective factors to determine whether the
      Commissioner erred in disregarding the form of the transaction in
      order to impose tax liability on the shareholders as “transferees”
      under § 6901. Under the second prong of the Stern test, the tax court
      should analyze whether the shareholders are liable under state law for
      Sloan Broadcasting/Arizona Media’s unpaid tax liability. See Salus
      Mundi, 776 F.3d at 1018, 1020. The tax court may begin its analysis
      with either prong. The Commissioner may hold the shareholders
      liable as “transferees” under § 6901 only if both prongs of the Stern
      test are satisfied. See id.
                                        - 11 -

[*11] Slone v. Commissioner, 810 F.3d at 608 (fn. ref. omitted). The prongs “are

separate and independent inquiries.” Id. at 605 (quoting Salus Mundi Found. v.

Commissioner, 776 F.3d at 1012).

      As instructed by the Court of Appeals, we may begin our analysis with

either prong. Therefore, we will address the second prong to determine whether

petitioners are “substantively liable for the transferor’s unpaid taxes under state

law”. See Salus Mundi Found. v. Commissioner, 776 F.3d at 1018.

I. State Law Prong

      We must apply Arizona law because that is the State where the transfer

occurred. Estate of Miller v. Commissioner, 42 T.C. 593, 598 (1964). Arizona

enacted the Uniform Fraudulent Transfer Act (UFTA) in 1990, and it outlines

when a transfer is fraudulent for State law purposes. Hullet v. Cousin, 63 P.3d

1029, 1032 (Ariz. 2003). The UFTA is codified at Ariz. Rev. Stat. Ann. secs. 44-

1001 to 1010 (2013), and is “based upon the uniform act promulgated by the

National Conference of Commissioners on Uniform State Laws in 1984. * * *

The UFTA replaced Arizona’s Uniform Fraudulent Conveyance Act (‘UFCA’)

* * *. Like the UFCA, the UFTA’s purpose is to protect creditors.” Hullet, 63

P.3d at 1032.
                                        - 12 -

[*12] A. The Form of the Stock Sale

      Respondent argues that the form of the stock sale should be disregarded and

treated as a liquidating distribution for purposes of applying the UFTA.

Petitioners, however, argue that the form of the stock sale should be respected.

Where a decision involves State law, we “must apply State law in the manner that

the highest court of the State has indicated that it would apply the law.” Swords

Trust v. Commissioner, 142 T.C. 317, 342 (2014). If the State’s highest court has

not weighed in on the matter, we “must predict how the highest state court would

decide the issue using intermediate appellate court decisions, decisions from other

jurisdictions, statutes, treatises, and restatements as guidance.” Vestar Dev. II,

LLC v. Gen. Dynamics Corp., 249 F.3d 958, 960 (9th Cir. 2001) (quoting Lewis v.

Tel. Emps. Credit Union, 87 F.3d 1537, 1545 (9th Cir. 1996)).

      Arizona has not provided a specific test to determine when the doctrine of

substance over form will be used to recast a transaction for purposes of the UFTA.

However, unless specifically displaced by its provisions, the principles of law and

equity supplement the UFTA. Ariz. Rev. Stat. Ann. sec. 44-1010. Accordingly,

we must look to other cases that have applied the substance over form doctrine in

similar situations. See Alterman Trust v. Commissioner, T.C. Memo. 2015-231.
                                         - 13 -

[*13] In order for the stock sale to be recast as a liquidating distribution,

respondent must prove that petitioners had actual or constructive knowledge of the

entire scheme. See id. at *48 (“[I]n order to ‘render the initial transferee’s

exchange with a debtor fraudulent, that transferee must have had either actual or

constructive knowledge of the entire scheme.’” (quoting Starnes v. Commissioner,

T.C. Memo. 2011-63, slip op. at 24)). We find that respondent did not sustain his

burden of proof as to either actual or constructive knowledge.

             1. Actual Knowledge

       Mrs. Slone was not involved in the business and was simply a signatory to

the sale documents. We hold that she did not have actual knowledge.

       Mr. Roberts advised Mr. Slone of Fortrend and MidCoast’s proposal to

purchase Slone Broadcasting’s stock, and Mr. Slone authorized Mr. Roberts to

investigate the transaction. Mr. Roberts hired Mr. Phillips to advise Mr. Slone on

proposals from Fortrend, and Mr. Slone met with Mr. Phillips to discuss the stock

sale on one occasion. Mr. Slone relied on his advisers’ expertise and had no

involvement in vetting the legitimacy of the transaction or negotiating its terms.

We hold that Mr. Slone did not have actual knowledge of the scheme that

Fortrend/Berlinetta planned to use to avoid paying Slone Broadcasting’s tax

liability.
                                       - 14 -

[*14] Mr. Roberts and Mr. Phillips knew that Fortrend planned to take steps to

reduce the amount of income tax due as a result of the asset sale but were

stonewalled when they asked about the strategy Berlinetta planned to use. They

were told that these methods were “proprietary” and could not be revealed. We

hold that, like Mr. and Mrs. Slone, that Mr. Roberts and Mr. Phillips did not have

actual knowledge of the scheme that Fortrend/Berlinetta planned to employ in

order to avoid payment of Slone Broadcasting’s income tax liability.

      Mr. Barkley and Mr. Gadarian similarly lacked actual knowledge of

Fortrend/Berlinetta’s scheme. Mr. Gadarian reviewed a memorandum prepared by

Mr. Phillips, performed his own research, and advised Mr. Barkley that there were

no material legal issues in proceeding with the stock sale. We hold that Mr.

Gadarian and Mr. Barkley had no actual knowledge of Fortrend/Berlinetta’s tax

avoidance scheme.

            2. Constructive Knowledge

      Constructive knowledge exists when, on the basis of the circumstances, the

transferee should have known about the entire scheme. Diebold Found., Inc. v.

Commissioner, 736 F.3d 172 (2d Cir. 2013), vacating and remanding Salus Mundi

Found. v. Commissioner, T.C. Memo. 2012-61; HBE Leasing v. Frank, 48 F.3d

623, 636 (2d Cir. 1995). It also exists in situations where transferees “were aware
                                        - 15 -

[*15] of circumstances that should have led them to inquire further into the

circumstances of the transaction, but * * * [they] failed to make such inquiry.”

Diebold Found., Inc. v. Commissioner, 736 F.3d at 187 (quoting HBE Leasing, 48

F.3d at 636).

      As noted above, Mrs. Slone had no involvement in the stock sale other than

signing documents. Mr. Slone relied on Mr. Roberts and Mr. Phillips to advise

him regarding the transaction’s propriety. Mr. Slone credibly testified at trial that

because he lacked the knowledge to determine whether it would be “all right” to

sell the Slone Broadcasting stock, he hired individuals with the requisite expertise

to advise him. He had no ownership interest and had resigned all positions in the

corporation at the time the stock sale closed. We hold that Mr. and Mrs. Slone did

not have constructive knowledge of Fortrend’s tax avoidance scheme.

      Mr. Roberts and Mr. Phillips were aware that Fortrend had a strategy to

reduce the income tax that would be due as a result of the asset sale. They made a

reasonable inquiry as to the actions Berlinetta would take to achieve the tax

savings and were told that Fortrend’s methods were “proprietary” and could not be

disclosed. But Fortrend did represent that Berlinetta had not engaged in any

transactions that would be deemed a listed transaction pursuant to Notice 2001-51,
                                         - 16 -

[*16] supra. Petitioners’ advisers similarly lacked constructive knowledge of

Fortrend/Berlinetta’s scheme.

         Mr. Gadarian, another independent tax attorney, was hired to advise the

Slone GST Trust with respect to any Fortrend proposals. Mr. Gadarian concluded

that there was no reason to think that Fortrend was involved in any impropriety.

         Petitioners’ advisers’ due diligence confirmed that MidCoast was a

legitimate player in the debt recovery business known for its “hardball” collection

tactics. MidCoast and Fortrend were represented by reputable law and accounting

firms.

         Mr. Phillips’ memorandum to Mr. Gadarian dated November 21, 2001,

explains Fortrend’s plan to offset the gains from the asset sale by contributing high

basis/low value assets to Berlinetta in a section 351 transaction and selling those

assets at a loss before the end of 2001. This information was insufficient to give

petitioners’ advisers knowledge of Fortrend’s scheme. As we have acknowledged

in other cases: “[T]here are legitimate tax planning strategies involving built-in

gains and losses and * * * it was not unreasonable, in the absence of contradictory

information, for the representatives to believe that the buyer had a legitimate tax

planning method.” Alterman Trust v. Commissioner, at *58 (quoting Swords

Trust v. Commissioner, 142 T.C. at 349).
                                        - 17 -

[*17] Petitioners and their advisers had no reason to believe that Fortrend’s

strategies were other than legitimate tax planning methods. We hold that the form

of the stock sale must be respected because petitioners and their advisers did not

have actual or constructive knowledge of Fortrend’s tax strategies before or after

the closing of the stock sale transaction.

      B. Application of the UFTA to the Stock Sale

      Now that we have determined that the form of the stock sale must be

respected, we will apply the UFTA to the transaction to determine whether

petitioners may be held substantively liable for Slone Broadcasting’s unpaid taxes

under Arizona law. Respondent asserts that petitioners are liable under the

constructive fraud provisions found in Ariz. Rev. Stat. Ann. secs. 44-1004(A)(2)

and 44-1005 and for actual fraud under Ariz. Rev. Stat. Ann. sec. 44-1004(A)(1).

We will address each in turn.

      For purposes of the UFTA, a “creditor” is defined as a person who has a

right to payment, and a “debtor” is a person who is liable for making the payment.

Id. sec. 44-1001(2), (3), (5). A transfer is broadly defined 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. 44-1001(9).
                                        - 18 -

[*18]         1. Ariz. Rev. Stat. Ann. Sec. 44-1004(A)(2)

        Ariz. Rev. Stat. Ann. sec. 44-1004(A)(2) provides that a transfer made by a

debtor is fraudulent as to a creditor

        if the debtor made the transfer * * * without receiving a reasonably
        equivalent value in exchange for the transfer or obligation, and the
        debtor either: (a) Was engaged or was about to engage in a business
        or a transaction for which the remaining assets of the debtor were
        unreasonably small in relation to the business or transaction. (b)
        Intended to incur, or believed or reasonably should have believed that
        he would incur, debts beyond his ability to pay as they became due.

This is true regardless of whether the creditor’s claim arose before or after the

transfer was made. Id.

        In these cases the IRS was the creditor and Slone Broadcasting was the

debtor. When petitioners sold their Slone Broadcasting shares, the consideration

they received was from Berlinetta, not from Slone Broadcasting. In fact, no

consideration was received from Slone Broadcasting because the form of the stock

sale transaction must be respected. Because no transfer was made by Slone

Broadcasting--the debtor--as a result of the stock sale, we hold there was no

constructive fraud pursuant to Ariz. Rev. Stat. Ann. sec. 44-1004(A)(2). See

Alterman Trust v. Commissioner, at *65 (“The IRS is a creditor of AC, but the AC

shareholders did not receive transfers from AC when they sold their stock to the

MidCoast acquisition vehicles.”).
                                         - 19 -

[*19]         2. Ariz. Rev. Stat. Ann. Sec. 44-1005

        The UFTA includes another constructive fraud provision. A transfer by a

debtor is fraudulent as to a creditor whose claim arose before the transfer was

made if the debtor made the transfer without receiving reasonably equivalent value

in exchange and was insolvent at that time or became insolvent as a result of the

transfer. Ariz. Rev. Stat. Ann. sec. 44-1005.

        As noted above, the stock sale resulted in Berlinetta’s making transfers to

petitioners, not Slone Broadcasting’s. Because there were no transfers made by

Slone Broadcasting, the debtor, we hold that Ariz. Rev. Stat. Ann. sec. 44-1005

cannot be applied to the stock sale. See Alterman Trust v. Commissioner, at *67

(“AC did not make any transfers to petitioners in the stock sale to the MidCoast

acquisition vehicles.”).

              3. Ariz. Rev. Stat. Ann. Sec. 44-1004(A)(1)

        The UFTA also has an actual fraud provision. A transfer by a debtor is

fraudulent as to a creditor, regardless of whether the creditor’s claim arose before

or after the transfer was made, if the debtor made the transfer “[w]ith actual intent

to hinder, delay or defraud any creditor of the debtor.” Ariz. Rev. Stat. Ann. sec.

44-1004(A)(1). Ariz. Rev. Stat. Ann. sec. 44-1004(B) sets forth the following 11

factors that may be considered when determining whether actual intent exists:
                                        - 20 -

[*20] 1. The transfer or obligation was to an insider.
      2. The debtor retained possession or control of the property
      transferred after the transfer.
      3. The transfer or obligation was disclosed or concealed.
      4. Before the transfer was made or obligation was incurred, the debtor
      had been sued or threatened with suit.
      5. The transfer was of substantially all of the debtor's assets.
      6. The debtor absconded.
      7. The debtor removed or concealed assets.
      8. The value of the consideration received by the debtor was
      reasonably equivalent to the value of the asset transferred or the
      amount of the obligation incurred.
      9. The debtor was insolvent or became insolvent shortly after the
      transfer was made or the obligation was incurred.
      10. The transfer occurred shortly before or shortly after a substantial
      debt was incurred.
      11. The debtor transferred the essential assets of the business to a
      lienor who transferred the assets to an insider of the debtor.

      There is no dispute that 5 of the 11 factors are not present in these cases.

We hold that the debtor, Slone Broadcasting: (1) did not retain possession or

control of the transferred property after the stock sale; (2) did not conceal the

stock sale; (3) had not been sued or threatened with suit before the stock sale; (4)

did not abscond; and (5) did not transfer the essential assets of the business to a

lienor who transferred the assets to one of its insiders. Respondent argues,

however, factors 1, 5, 7, 8, 9, and 10 do apply to these cases. We will address

each in turn.
                                        - 21 -

[*21]               a. Factor 1: Transfer to an Insider

        Respondent argues that Slone Broadcasting’s assets were transferred to

insiders. This argument fails because we have held that the form of the stock sale

must be respected. Petitioners sold their stock in Slone Broadcasting to Berlinetta

in exchange for cash, and there was no transfer of Slone Broadcasting’s assets to

petitioners. This factor does not weigh in favor of finding actual fraud under the

UFTA.

                    b. Factor 5: Transfer of Substantially All Assets

        Respondent alleges that the cash petitioners received in exchange for their

shares constituted a liquidating distribution of substantially all of Slone

Broadcasting’s assets. We disagree because the form of the stock sale must be

respected. Petitioners received cash from Berlinetta in exchange for their Slone

Broadcasting shares. They did not receive a transfer of substantially all of Slone

Broadcasting’s assets. This factor does not weigh in favor of finding actual fraud

under the UFTA.

                    c. Factor 7: Debtor Removed or Concealed Assets

        Respondent asserts that petitioners removed Slone Broadcasting’s assets

because they received, in substance, a liquidating distribution in exchange for their

stock in a de facto liquidation. Because we have held that the form of the stock
                                         - 22 -

[*22] sale must be respected, we disagree. The transfer at issue in these cases, the

stock sale, did not result in a removal of Slone Broadcasting’s assets. Petitioners

are not responsible for Berlinetta’s actions that occurred after the closing of the

stock sale. This factor does not weigh in favor of finding actual fraud under the

UFTA.

                    d. Factor 8: Value of Consideration Debtor Received
                       Reasonably Equivalent to Value of Asset Transferred

      Respondent alleges that Slone Broadcasting did not receive consideration in

exchange for the transfer of its assets. Because we have held that the form of the

stock sale must be respected, we disagree. Petitioners received cash from

Berlinetta in exchange for their Slone Broadcasting shares. Slone Broadcasting

did not surrender any assets or receive any consideration in connection with the

stock sale. This factor does not weigh in favor of finding actual fraud under the

UFTA.

                    e. Factor 9: Debtor Insolvent or Became Insolvent Shortly
                       After Transfer Was Made

      For purposes of the UFTA, “[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.” Ariz. Rev. Stat.

Ann. sec. 44-1002(A). Debtors that are not generally paying their debts as they

come due are presumed to be insolvent. Id. sec. 44-1002(B).
                                        - 23 -

[*23] Slone Broadcasting’s assets exceeded its debts at the closing date of the

stock sale. Slone Broadcasting paid $3.1 million as an estimated payment towards

its Federal income tax liability before the closing of the stock sale. Respondent

did not prove that the sum of Slone Broadcasting/Arizona Media’s debts was

greater than all of Slone Broadcasting/Arizona Media’s assets at a fair valuation.

Nor did he prove that Slone Broadcasting/Arizona Media was not paying its debts

as they came due. Arizona Media’s Federal income tax liability was in dispute

until it became fixed on April 14, 2008, when it submitted a Form 870-AD, Offer

to Waive Restrictions on Assessment and Collection of Tax Deficiency and to

Accept Overassessment, accepting a deficiency for its TYE June 30, 2002.

Accordingly, respondent has not met his burden of proof to show that at the time

of the stock sale, or shortly thereafter, Slone Broadcasting/Arizona Media was

insolvent. This factor does not weigh in favor of finding actual fraud under the

UFTA.

                    f. Factor 10: Transfer Occurred Shortly Before or Shortly
                       After Substantial Debt Was Incurred

      Respondent argues that the stock sale occurred shortly after the sale of

Slone Broadcasting’s assets, which gave rise to substantial debt--its tax liabilities.

The UFTA defines “debt” as a liability on a claim, and the term “claim” is broadly
                                        - 24 -

[*24] defined to mean a right to payment, even if contingent, unmatured and

unsecured. Id. sec. 44-1001(2), (4). The sale of Slone Broadcasting’s assets to

Citadel on July 2, 2001, resulted in an estimated combined Federal and State

income tax liability of approximately $15 million. Approximately five months

later, at the time of the stock sale, Slone Broadcasting had a debt for the presumed

tax due from the asset sale. This factor does not persuade us to hold that there was

actual fraud under the UFTA.

        Our evaluation of the factors set forth in the UFTA leads us to conclude that

there was no actual fraud, and we so hold.

II. Conclusion

        On the basis of the above analysis, we hold that the State law prong of the

Stern test has not been satisfied. Satisfaction of both prongs of the Stern test is

necessary in order for respondent to prevail in these cases. See Slone v.

Commissioner, 810 F.3d at 608 (“The Commissioner may hold the shareholders

liable as ‘transferees’ under § 6901 only if both prongs of the Stern test are

satisfied.”). Because we have held that the State law prong of the Stern test has

not been satisfied, it is not necessary for us to analyze the Federal law prong of the

test.
                                      - 25 -

[*25] In reaching our decision, we have considered all arguments, and, to the

extent not mentioned above, we conclude they are moot, irrelevant, or without

merit.

         To reflect the foregoing,


                                                     Decisions will be entered for

                                               petitioners.
