                                              JULIA R. SWORDS TRUST, TRANSFEREE, MARGARET R.
                                               MACKELL, DOROTHY R. BROTHERTON, AND JULIA R.
                                                SWORDS, CO-TRUSTEES, ET AL., 1 PETITIONERS v.
                                                    COMMISSIONER OF INTERNAL REVENUE,
                                                                RESPONDENT
                                               Docket Nos. 10882–10, 10883–10,                          Filed May 29, 2014.
                                                           10884–10, 10885–10.

                                                 R issued notices of transferee liability to Ps to collect D’s
                                               unpaid Federal income tax pursuant to I.R.C. sec. 6901. R
                                               argues that the following two-step analysis applies in deter-
                                               mining whether Ps are liable for D’s unpaid tax: (1) analyze
                                               whether the subject transactions are recast under Federal
                                               law, here primarily the Federal substance over form doctrine,
                                               and then (2) apply State law to the transactions as recast
                                               under Federal law. Held: I.R.C. sec. 6901 requires that the
                                               Court apply State (rather than Federal) law to determine
                                               whether a transaction is recast under a substance over form
                                               (or similar) doctrine. Held, further, R has failed to establish

                                       1 Cases of the following petitioners are consolidated herewith: David P.

                                     Reynolds Trust, Transferee, Margaret R. Mackell, Dorothy R. Brotherton,
                                     and Julia R. Swords, Co-Trustees, docket No. 10883–10; Margaret R.
                                     Mackell Trust, Transferee, Margaret R. Mackell, Dorothy R. Brotherton,
                                     and Julia R. Swords, Co-Trustees, docket No. 10884–10; and Dorothy R.
                                     Brotherton Trust, Transferee, Margaret R. Mackell, Dorothy R.
                                     Brotherton, and Julia R. Swords, Co-Trustees, docket No. 10885–10.

                                                                                                                                  317




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                                     318                 142 UNITED STATES TAX COURT REPORTS                                    (317)

                                               that an independent basis exists under applicable State law
                                               or State equity principles for holding Ps liable for D’s unpaid
                                               tax.

                                        Timothy L. Jacobs and William Lee S. Rowe, for peti-
                                     tioners.
                                        Randall L. Eager, Jr., Timothy B. Heavner, Matthew S.
                                     Reddington, James R. Rich, Kristina L. Rico, and Johnny C.
                                     Young, for respondent.
                                        MARVEL, Judge: These consolidated cases concern separate
                                     notices of liability that respondent issued to the cotrustees of
                                     the Julia R. Swords Trust (Swords Trust), the David P.
                                     Reynolds Trust (Reynolds Trust), the Margaret R. Mackell
                                     Trust (Mackell Trust), and the Dorothy R. Brotherton Trust
                                     (Brotherton      Trust)    (collectively, petitioner   trusts). 2
                                     Respondent determined in the notices that petitioner trusts
                                     are liable as transferees for Davreyn Corp.’s (Davreyn) Fed-
                                     eral income tax deficiency of $4,602,986, 3 additions to tax
                                     under section 6651(a)(1) and (2) 4 of $1,160,137 and $1,982,
                                     respectively, an accuracy-related penalty under section 6662
                                     of $920,597, fees of $50, and related interest for Davreyn’s
                                     taxable year ended (TYE) February 15, 2001. The amount of
                                     each petitioner trust’s transferee liability as calculated by
                                     respondent is as follows: Swords Trust—$3,833,988,
                                     Reynolds Trust—$2,710,241, Mackell Trust—$3,833,988, and
                                     Brotherton Trust—$3,833,988. These calculated liabilities
                                     stem primarily from respondent’s determination recharacter-
                                     izing petitioner trusts’ February 15, 2001, sales 5 of their
                                     Davreyn stock as a sale of assets by Davreyn followed by
                                     Davreyn’s distribution of its assets to petitioner trusts in liq-
                                     uidation.
                                        The sole issue for decision is whether petitioner trusts are
                                     liable as transferees under section 6901 for Davreyn’s unpaid
                                       2 The cotrustees of each of these trusts are Margaret R. Mackell, Dorothy

                                     R. Brotherton, and Julia R. Swords.
                                       3 Some monetary amounts have been rounded to the nearest dollar.
                                       4 Unless otherwise indicated, section references are to the applicable

                                     versions of the Internal Revenue Code, as amended, and Rule references
                                     are to the Tax Court Rules of Practice and Procedure.
                                       5 Our use in the findings of fact of ‘‘sale’’, ‘‘purchase’’, and similar words

                                     generally is for convenience and is not intended to, and does not, constitute
                                     a finding that the referenced transactions were valid transactions recog-
                                     nized for Federal income tax purposes.




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        319


                                     Federal income tax liability for Davreyn’s TYE February 15,
                                     2001. We hold that petitioner trusts are not liable as trans-
                                     ferees under section 6901.

                                                                          FINDINGS OF FACT

                                       Some facts have been stipulated and are so found. The
                                     stipulations of fact and the facts drawn from stipulated
                                     exhibits are incorporated herein by this reference. When the
                                     petitions were filed, each petitioner trust had a mailing
                                     address in Virginia. Also at that time, Ms. Mackell and Ms.
                                     Brotherton resided in Virginia, and Ms. Swords resided in
                                     Kentucky.
                                     I. The Reynolds Family and Petitioner Trusts
                                       In 1919 Richard S. Reynolds, Sr., founded the Reynolds
                                     Metal Co. (Reynolds Metal). Reynolds Metal produced the
                                     popular     aluminum      foil   brand,     Reynolds    Wrap.
                                     Headquartered in Richmond, Virginia, Reynolds Metal was,
                                     at one time, the third largest aluminum company in the
                                     world.
                                       David Parham Reynolds (Mr. Reynolds), who died on
                                     August 29, 2011, was the son of Richard S. Reynolds, Sr.,
                                     and the sole beneficiary of the Reynolds Trust. The Reynolds
                                     Trust was established by an instrument of indenture dated
                                     May 14, 1932.
                                       Mr. Reynolds’ only children are his daughters: Ms. Swords,
                                     Ms. Mackell, and Ms. Brotherton. Ms. Swords and her
                                     descendants are the sole beneficiaries of the Swords Trust.
                                     Ms. Mackell and her descendants are the sole beneficiaries
                                     of the Mackell Trust. Ms. Brotherton and her descendants
                                     are the sole beneficiaries of the Brotherton Trust. The
                                     Swords Trust, the Mackell Trust, and the Brotherton Trust
                                     were established by separate instruments of indenture dated
                                     February 22, 1957.
                                       When Mr. Reynolds became ill in the late 1990s, Ms.
                                     Swords, Ms. Mackell, and Ms. Brotherton became primarily
                                     responsible for managing petitioner trusts. They served as
                                     cotrustees for petitioner trusts at all relevant times. Robert
                                     H. Griffin, a certified public accountant (C.P.A.) and a
                                     partner at the Virginia accounting firm of Mitchell Wiggins




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                                     320                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     & Co., LLP (Mitchell Wiggins), has provided accounting and
                                     tax services to petitioner trusts for decades.
                                     II. Davreyn
                                        In 1961 Davreyn was established and began business as a
                                     Virginia corporation. At all relevant times Davreyn was a
                                     personal holding company (PHC). Each petitioner trust
                                     received a substantial number of Davreyn shares at the time
                                     of Davreyn’s formation.
                                        Before June 2000 Davreyn held a substantial number of
                                     shares in Reynolds Metal. In June 2000 Reynolds Metal
                                     merged with Alcoa, Inc. (Alcoa), another American aluminum
                                     company, and Davreyn’s existing Reynolds Metal shares were
                                     converted into Alcoa shares.
                                        As of February 1, 2001, Davreyn had assets as follows: (1)
                                     409,830 shares of Alcoa stock and (2) an investment in the
                                     Goldman Sachs 1999 Exchange Place Fund (Goldman Sachs
                                     fund). The value of the Alcoa stock held by Davreyn exceeded
                                     $14 million as of February 2001.
                                        As of February 14, 2001, the Swords Trust, the Mackell
                                     Trust, and the Brotherton Trust owned all of Davreyn’s
                                     common stock. Each trust owned 1,656 of the 4,968 issued
                                     and outstanding shares of Davreyn’s common stock. The
                                     Reynolds Trust owned all of the 35,428 issued and out-
                                     standing shares of Davreyn’s preferred stock.
                                        Also as of February 14, 2001, Davreyn had officers and
                                     directors as follows: (1) Ms. Mackell, who served as presi-
                                     dent, treasurer, and director, (2) Ms. Swords, who served as
                                     vice president and director, (3) Ms. Brotherton, who served
                                     as vice president and director, and (4) Mr. Griffin, who
                                     served as secretary and director. Mr. Griffin also served as
                                     an accountant and adviser to Davreyn, and he prepared its
                                     Federal income tax returns for its taxable years before the
                                     year in issue. Before the transactions at issue, neither Ms.
                                     Swords, Ms. Mackell, nor Ms. Brotherton made any change
                                     to Davreyn’s operation, except for diversifying Davreyn’s
                                     holdings by investing in the Goldman Sachs fund.




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        321


                                     III. Petitioner Trusts’ Sales of Davreyn Stock
                                           A. Initial Meetings and Negotiations
                                       In the late 1990s BDO Seidman, an accounting firm,
                                     advised its local offices about an opportunity for PHC share-
                                     holders to sell their appreciated PHC stock to a financial
                                     buyer in a tax efficient manner. Jon Glazman, a C.P.A. with
                                     BDO Seidman, contacted several attorneys, including Tom
                                     Word, an attorney at McGuireWoods LLP (McGuireWoods),
                                     to inform them of this opportunity. Mr. Word relayed this
                                     opportunity to other McGuireWoods attorneys, including
                                     Thomas Rohman, a tax partner. Mr. Rohman later contacted
                                     Mr. Glazman about a potential sale of PHC stock by clients
                                     of Mr. Rohman. Mr. Glazman put Mr. Rohman in touch with
                                     Maurice Gottlieb, another C.P.A. at BDO Seidman who
                                     specialized in PHC stock sale transactions. Eventually, Mr.
                                     Rohman and Mr. Glazman began working together to sell
                                     PHC stock to financial buyers. As of the beginning of Feb-
                                     ruary 2000 Mr. Gottlieb had structured several transactions
                                     similar to the one at issue with the assistance of Mr.
                                     Rohman.
                                       Mr. Rohman at some point contacted Mr. Griffin and
                                     advised him of the opportunity for shareholders to sell their
                                     PHC stock to a financial buyer. Although neither Mr. Griffin
                                     nor petitioner trusts were marketing or seeking to market
                                     Davreyn, Mr. Griffin recognized that Davreyn was a can-
                                     didate for this opportunity because Davreyn was a PHC that
                                     held highly appreciated stock. On or before February 10,
                                     2000, Mr. Griffin mentioned to Mr. Rohman that Davreyn
                                     was such a possible candidate, and Mr. Rohman relayed that
                                     information to Mr. Gottlieb.
                                       On February 10, 2000, at Mr. Gottlieb’s request, Mr.
                                     Rohman sent to Mr. Gottlieb and Mr. Glazman an email pro-
                                     viding more detailed information about a potential sale of
                                     Davreyn’s stock, including information about Davreyn’s tax
                                     basis in its assets. In the email Mr. Rohman indicated that
                                     Davreyn held two assets, the total market value of which
                                     was $15,526,639. These assets were: (1) 193,317 shares of
                                     Reynolds Metal common stock, with a market value of
                                     $14,498,775, and (2) the Goldman Sachs fund shares, with a
                                     market value of $1,027,864.




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                                     322                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                        On March 7, 2000, Mr. Rohman and Mr. Griffin again dis-
                                     cussed a potential sale of Davreyn’s stock. 6 Nine days later,
                                     a meeting was held between Ms. Mackell, Ms. Brotherton,
                                     Mr. Rohman, Mr. Griffin, and Lizzie Amos, a manager at
                                     Mitchell Wiggins. At the meeting Mr. Griffin and Ms. Amos
                                     advised Ms. Mackell and Ms. Brotherton that petitioner
                                     trusts had five options with respect to Davreyn: (1) continue
                                     Davreyn, (2) liquidate Davreyn, (3) sell Davreyn’s stock for
                                     90% of the fair market value (FMV) of its assets, (4) sell
                                     Davreyn’s stock for the sum of 90% of the FMV of the
                                     Reynolds Metal stock plus 25% of the FMV of the Goldman
                                     Sachs fund shares, or (5) sell Davreyn’s stock for 90% of the
                                     FMV of the Reynolds Metal stock and distribute the Gold-
                                     man Sachs fund shares to a limited liability company (LLC).
                                     Mr. Griffin advised Ms. Mackell and Ms. Brotherton
                                     regarding the potential sale price, as well as the mechanics
                                     and tax consequences of a potential sale of Davreyn’s stock.
                                        Because of the merger between Reynolds Metal and Alcoa,
                                     any plans regarding the sale of Davreyn’s stock were put on
                                     hold. After the merger, in September 2000, Mr. Rohman
                                     again met with Mr. Griffin, Ms. Mackell, and Ms. Brotherton
                                     to discuss the potential sale of Davreyn’s stock to a financial
                                     buyer. At the meeting Mr. Rohman did not discuss the
                                     buyer’s plans with respect to either Davreyn or Davreyn’s
                                     assets.
                                        Following the meeting, on September 8, 2000, Mr. Rohman
                                     sent to Ms. Swords, Ms. Mackell, and Ms. Brotherton a
                                     memorandum reiterating his presentation and outlining the
                                     proposed sale transaction. In the memorandum Mr. Rohman
                                     advised that, because of the financial buyer’s ‘‘peculiar’’ tax
                                     situation, a sale of Davreyn’s stock to the financial buyer
                                     would be an attractive option for petitioner trusts. Mr.
                                     Rohman also stated that the financial buyer would not be
                                     interested in purchasing Davreyn if it held any assets other
                                     than the Alcoa stock. 7 To account for the existence of the
                                       6 Mr. Griffin testified that this discussion was the first time he knew

                                     that there was a buyer interested in purchasing Davreyn stock. However,
                                     Mr. Rohman sent the February 10, 2000, email to Mr. Gottlieb and Mr.
                                     Glazman containing detailed information about Davreyn. We therefore re-
                                     ject the referenced testimony and find that Mr. Rohman and Mr. Griffin
                                     discussed the sale of Davreyn stock on or before February 10, 2000.
                                       7 Mr. Rohman calculated Davreyn’s assets as follows: (1) Alcoa stock,




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        323


                                     other asset, namely, the Goldman Sachs fund shares, Mr.
                                     Rohman proposed that the transaction proceed as follows: (1)
                                     Davreyn organizes an LLC, (2) Davreyn transfers the Gold-
                                     man Sachs fund shares to the LLC, (3) Davreyn distributes
                                     to petitioner trusts the ownership interests in the LLC in
                                     exchange for some of their Davreyn shares, and (4) petitioner
                                     trusts sell their Davreyn stock to the financial buyer for
                                     cash. Mr. Rohman advised that the purchase price for the
                                     Davreyn stock would equal: (1) 90% of the FMV of the Alcoa
                                     stock, (2) 100% of all the accrued dividends on the Alcoa
                                     stock, and (3) 100% of Davreyn’s cash on hand at closing,
                                     ‘‘less the amount of the estimated corporate income tax
                                     incurred by it on the distribution’’ of the Goldman Sachs
                                     fund shares to the LLC.
                                         With respect to the tax consequences, Mr. Rohman advised
                                     that petitioner trusts would recognize long-term capital gain
                                     in amounts equal to the difference between the total stock
                                     sale price and petitioner trusts’ tax bases in their Davreyn
                                     stock. He further advised that after the transaction, peti-
                                     tioner trusts would own 100% of the LLC and that the LLC
                                     would have a tax basis in the Goldman Sachs fund shares
                                     equal to their FMV. Mr. Rohman noted that Davreyn would
                                     recognize taxable gain equal to the difference between its tax
                                     basis and the FMV of the Goldman Sachs fund shares and
                                     that ‘‘[t]he burden of this corporate income tax liability would
                                     effectively fall on the shareholders because the Buyer would
                                     reduce the Purchase Price by the amount of this corporate
                                     income tax liability.’’ Mr. Rohman concluded that petitioner
                                     trusts would recognize long-term capital gain of $13,031,000
                                     and pay tax of $3,356,000 with respect to the proposed stock
                                     sale. 8
                                         Although Ms. Swords, Ms. Mackell, and Ms. Brotherton
                                     had not previously considered selling petitioner trusts’ shares
                                     in Davreyn, arranging a sale of Davreyn’s assets, or liqui-
                                     dating Davreyn, they agreed on the advice of Mr. Griffin and
                                     Mr. Rohman to sell petitioner trusts’ Davreyn stock to the
                                     financial buyer. Neither Mr. Griffin, Ms. Swords, Ms.
                                     with an estimated tax basis of $1 million and an estimated value of
                                     $13,857,000 and (2) Goldman Sachs fund shares, with an estimated tax
                                     basis of $167,000 and an estimated value of $860,000.
                                       8 Mr. Rohman calculated petitioner trusts’ tax liabilities assuming a 20%

                                     Federal income tax rate and a 5.75% State income tax rate.




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                                     324                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     Mackell, nor Ms. Brotherton were aware of the buyer’s
                                     identity or the buyer’s plan with respect to Davreyn or the
                                     Alcoa stock Davreyn owned. The buyer was not acting as the
                                     agent of petitioner trusts, and Ms. Swords, Ms. Mackell, and
                                     Ms. Brotherton were not aware of any plan by the financial
                                     buyer to cause Davreyn or any other taxpayer to illegit-
                                     imately avoid the payment of tax. Mr. Griffin subsequently
                                     contacted Mr. Rohman to advise him that petitioner trusts
                                     wanted to sell their Davreyn stock to the financial buyer.
                                       On September 13, 2000, Mr. Rohman sent an email to the
                                     chief financial officer (CFO) of Integrated Capital Associates
                                     (ICA), 9 Howard B. Teig, 10 regarding the proposed stock sale
                                     transaction. In the email Mr. Rohman described Davreyn and
                                     indicated that Davreyn would transfer the Goldman Sachs
                                     fund shares to an LLC before the proposed stock sale. After
                                     exchanging a series of emails, on September 15, 2000, Mr.
                                     Teig sent to Mr. Rohman an email with an attached draft
                                     letter of intent.
                                           B. Formation of Davreyn LLC
                                        On September 15, 2000, Mr. Rohman caused Davreyn LLC
                                     to be formed. At formation Davreyn was the sole member of
                                     Davreyn LLC. Ms. Mackell and Ms. Brotherton were the ini-
                                     tial managers of Davreyn LLC.
                                           C. Letter of Intent and Stock Purchase Agreement
                                       On December 14, 2000, Mr. Rohman emailed Mr. Teig to
                                     inform him that the officers and directors of Davreyn had
                                     agreed to the proposed stock sale. After exchanging emails
                                     Mr. Rohman sent to Mr. Teig an email with an attached
                                     draft letter of intent.
                                        9 ICA was an investment banking firm incorporated under Delaware law

                                     and based in New York City and San Francisco. ICA had a number of af-
                                     filiates, including Integrated Acquisition Group, LLC (IAG), and ICA Fund
                                     Manager, Inc. (ICA Fund Manager). In addition to his role as CFO of ICA
                                     Fund Manager, Mr. Teig served as CFO of IAG and ICA Fund Manager.
                                        10 Mr. Teig, a C.P.A., performed all of ICA’s accounting work, including

                                     the preparation of its tax returns. With respect to financial transactions
                                     between ICA and a third party, Mr. Teig performed due diligence and
                                     worked with the third parties and outside counsel to finalize the trans-
                                     actions.




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        325


                                        On January 19, 2001, ICA sent a letter of intent to
                                     Davreyn. The letter of intent proposed a purchase price equal
                                     to: (1) 90% of the FMV of Davreyn’s marketable securities
                                     plus (2) 100% of Davreyn’s cash and accrued dividend and
                                     interest income. The letter provided that petitioner trusts
                                     would permit ICA to conduct a full due diligence review of
                                     Davreyn before closing. The letter also provided that the
                                     buyer would obtain sufficient acquisition financing. Mr. Teig
                                     signed the letter of intent as CFO of ICA. Ms. Swords, Ms.
                                     Mackell, and Ms. Brotherton executed the letter of intent on
                                     behalf of petitioner trusts and returned the executed letter of
                                     intent to ICA on January 26, 2001.
                                        On January 22, 2001, Mr. Rohman sent to Mr. Teig an ini-
                                     tial draft of the Stock Purchase and Redemption Agreement
                                     (stock purchase agreement). With respect to the tax con-
                                     sequences of the transaction, the stock purchase agreement
                                     provided that, among other things: (1) the purchase price
                                     payable on the closing date would be reduced by an amount
                                     equal to the net interim tax liability, 11 (2) the buyer would
                                     prepare and file any returns on behalf of Davreyn and pay
                                     the related tax for any taxable periods beginning before the
                                     closing date and ending after the closing date, (3) the buyer
                                     would not cause Davreyn to become a member of a consoli-
                                     dated group for tax purposes after the closing, 12 and (4) the
                                     redemption transaction would qualify as a redemption
                                     treated as an exchange pursuant to section 302(b)(3). While
                                     the stock purchase agreement indicated that the buyer was
                                     a statutory trust, the stock purchase agreement did not iden-
                                     tify the buyer by name.


                                        11 The stock purchase agreement provided that the net interim tax liabil-

                                     ity would be equal to the difference between the quarterly tax estimate
                                     and the interim tax liability. The quarterly tax estimate would be equal
                                     to Davreyn’s estimated tax payments for the period beginning January 1,
                                     2001, and ended April 15, 2001. The interim tax liability would be equal
                                     to Davreyn’s estimated Federal and State tax liability for the period begin-
                                     ning January 1, 2001, and ended on the closing date. In the closing state-
                                     ment Mitchell Wiggens calculated the interim tax liability as $49,800.
                                        12 The stock purchase agreement also provided that after the closing the

                                     buyer would file articles of amendment with the Virginia State Corpora-
                                     tion Commission to change Davreyn’s name.




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                                     326                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                       On February 6, 2001, Dan L. Rosenbaum 13 emailed Mr.
                                     Rohman and Mr. Teig an edited copy of the stock purchase
                                     agreement. In the edited stock purchase agreement, Mr.
                                     Rosenbaum changed the purchaser’s name to Alrey Statutory
                                     Trust (Alrey Trust). Alrey Trust 14 was a Connecticut statu-
                                     tory trust established by First Union and Alrey LLC. 15
                                           D. Davreyn’s Closing Preparations
                                       Mr. Teig requested that Mr. Rohman instruct Davreyn to:
                                     (1) open an account at DB Alex. Brown, LLC, a subsidiary
                                     of Deutsche Bank AG (collectively, Deutsche Bank) and (2)
                                     transfer its Alcoa stock to Davreyn’s newly opened Deutsche
                                     Bank account. Accordingly, on February 9, 2001, Ms. Mackell
                                     and Ms. Brotherton executed an account agreement to open
                                     a brokerage account with Deutsche Bank on behalf of
                                     Davreyn. On February 13, 2001, Davreyn transferred its
                                     Alcoa stock to its Deutsche Bank account.
                                           E. IAG’s Transfer of Alrey Trust
                                       On February 13, 2001, in exchange for $525,000, IAG
                                     assigned to Alrey Acquisition Corp. (Alrey Acquisition) 16 its
                                     100% membership interest in Alrey LLC, the trustor of Alrey
                                       13 Mr. Rosenbaum was an attorney at the law firm of Sonnenschein,

                                     Nath & Rosenthal LLP (Sonnenschein).
                                       14 On February 7, 2001, Alrey LLC and First Union National Bank (First

                                     Union) entered into a trust agreement to establish Alrey Trust. Mr. Teig,
                                     acting as CFO of ICA Fund Manager (at the time, the manager of Alrey
                                     LLC), signed the trust agreement on behalf of Alrey LLC, the trustor.
                                     W. Jeffrey Kramer, acting as vice president of First Union, signed the
                                     trust agreement on behalf of First Union, the trustee. Alrey Trust was ter-
                                     minated on June 16, 2003.
                                       15 Alrey LLC, a Delaware limited liability company, was formed on Feb-

                                     ruary 6, 2001. Mr. Rosenbaum acted as incorporator for Alrey LLC. At the
                                     time of formation IAG was the sole member of Alrey LLC. ICA Fund Man-
                                     ager was the initial manager of Alrey LLC. At all relevant times Alrey
                                     LLC was treated as a disregarded entity for Federal income tax purposes
                                     pursuant to sec. 301.7701–2(c)(2)(i), Proced. & Admin. Regs.
                                       16 Alrey Acquisition, a Delaware corporation, was formed on February 6,

                                     2001. Mr. Rosenbaum acted as incorporator for Alrey Acquisition. On Feb-
                                     ruary 6, 2001, Mr. Rosenbaum, acting on behalf of Alrey Acquisition,
                                     adopted a resolution electing Larry J. Austin as the sole director of Alrey
                                     Acquisition. Sunny Capital Assets 1999 Trust (Sunny Capital) was the sole
                                     shareholder of Alrey Acquisition. Mr. Austin was the trustee of Sunny
                                     Capital.




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        327


                                     Trust. Following the transfer Mr. Austin was appointed as
                                     the manager of Alrey LLC. Accordingly, as of February 13,
                                     2001, Alrey LLC was owned outright by Alrey Acquisition,
                                     which had only one shareholder, Sunny Capital. Further-
                                     more, as of February 13, 2001, Mr. Austin was the manager
                                     of Alrey LLC and the sole director, president, secretary, and
                                     treasurer of Alrey Acquisition.
                                           F. Alrey Trust’s Financing
                                       Integrated Holdings Ltd. (Integrated Holdings), a company
                                     in the Cayman Islands, 17 provided financing, via a loan and
                                     a promissory note, for Alrey Trust’s acquisition of Davreyn’s
                                     stock. On February 14, 2001, $16 million was deposited into
                                     Alrey Trust’s account at First Union, presumably by
                                     Integrated Holdings.
                                           G. The Redemption Transaction
                                       On February 15, 2001, Davreyn transferred the Goldman
                                     Sachs fund shares to Davreyn LLC in exchange for a 100%
                                     membership interest in Davreyn LLC. Davreyn then
                                     redeemed 1 share of its issued and outstanding common
                                     stock from each of the Swords Trust, the Mackell Trust, and
                                     the Brotherton Trust in exchange for the distribution of one-
                                     third of its membership interest in Davreyn LLC to each of
                                     those trusts. Following the redemption transaction the
                                     Swords Trust, the Mackell Trust, and the Brotherton Trust
                                     each owned 1,655 shares of Davreyn common stock and a
                                     one-third membership interest in Davreyn LLC.
                                           H. The Stock Sale Transaction
                                       Davreyn, petitioner trusts, and Alrey Trust entered into
                                     the stock purchase agreement on February 15, 2001. Ms.
                                     Mackell executed the stock purchase agreement on behalf of
                                     Davreyn, Ms. Swords, Ms. Mackell, and Ms. Brotherton
                                     executed the stock purchase agreement on behalf of peti-
                                       17 ICA and First Union planned to use Integrated Holdings as a financier

                                     for the Davreyn stock sale transaction as early as February 7, 2001. Mr.
                                     Teig testified that Integrated Holdings was a third party unrelated to ICA.
                                     However, he later testified that ICA often established entities that began
                                     with the word ‘‘integrated’’ and admitted that it was possible that ICA es-
                                     tablished Integrated Holdings.




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                                     tioner trusts, and Mr. Kramer executed the stock purchase
                                     agreement on behalf of Alrey Trust.
                                        Pursuant to the stock purchase agreement, on February
                                     15, 2001, the Swords Trust, the Mackell Trust, and the
                                     Brotherton Trust each sold 1,655 shares of Davreyn common
                                     stock and the Reynolds Trust sold all of its shares of Davreyn
                                     preferred stock to Alrey Trust. In exchange Alrey Trust
                                     transferred $13,102,055 in cash to an escrow account held by
                                     McGuireWoods. 18 On that same date the cash proceeds were
                                     wired from the McGuireWoods escrow account to peti-
                                     tioner trusts’ accounts at Merrill Lynch as follows:
                                     Reynolds Trust—$2,673,431, Swords Trust—$3,416,891,
                                     Mackell Trust—$3,416,891, Brotherton Trust—$3,416,891. A
                                     portion of the cash proceeds was used to pay petitioner
                                     trusts’ representatives; McGuireWoods and Mitchell Wiggins
                                     received payments of $139,500 and $38,450, respectively.
                                        Mr. Griffin and Ms. Swords, Ms. Mackell, and Ms.
                                     Brotherton then resigned from their positions as the officers
                                     and directors of Davreyn, effective February 15, 2001. By
                                     letter dated February 15, 2001, Ms. Mackell released her
                                     authority over Davreyn’s Deutsche Bank account.
                                     IV. Alrey Trust’s Pre- and Post-Closing Transactions
                                           A. Background
                                       On February 14, 2001, in anticipation of the closing of the
                                     sale with respect to Alrey Trust’s purchase of Davreyn’s
                                     stock, Alrey Trust entered into a stock purchase agreement
                                     with Deutsche Bank for the sale of Davreyn’s Alcoa stock. On
                                     the same day, Mr. Kramer accepted the Deutsche Bank offer
                                     on behalf of Alrey Trust. The stock purchase agreement
                                     between Deutsche Bank and Alrey Trust provided that the
                                     sale price would be determined on the basis of Alcoa’s
                                     closing price on February 14, 2001. Alcoa stock closed at
                                     $35.49 per share on February 14, 2001.


                                           18 According
                                                     to the closing statement the $13,102,055 equaled (1) 90% of
                                     the $14,544,867 FMV of Davreyn’s Alcoa stock as determined on the basis
                                     of Alcoa’s closing price on February 14, 2001, plus (2) $61,475 of accrued
                                     dividends, less (3) a $49,800 interim tax liability as computed by Mitchell
                                     Wiggins.




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                                     (317)                     SWORDS TRUST v. COMMISSIONER                                        329


                                           B. Davreyn’s Liquidation and Other Post-Closing Transac-
                                              tions
                                        By documents dated February 15, 2001, Mr. Kramer,
                                     acting on behalf of Alrey Trust, and Mr. Austin, acting as
                                     director of Davreyn, resolved that Davreyn be completely liq-
                                     uidated in accordance with section 331. In an attached plan
                                     of liquidation Mr. Austin provided that Davreyn would dis-
                                     tribute all of its assets to Alrey Trust in redemption and can-
                                     cellation of all of the outstanding Davreyn stock. Further, on
                                     February 15, 2001, Mr. Austin authorized dissolution of
                                     Davreyn and caused to be filed with the Virginia State Cor-
                                     poration Commission articles terminating Davreyn’s cor-
                                     porate existence.
                                        Davreyn was liquidated on February 15, 2001, and its
                                     assets were distributed to Alrey Trust. Mr. Austin directed
                                     Deutsche Bank to transfer the Alcoa stock in Davreyn’s
                                     Deutsche Bank account to Alrey Trust’s account at Deutsche
                                     Bank, and Deutsche Bank did so. In addition, Sunny Capital
                                     assigned to Alrey Acquisition its shares of common stock of
                                     BMY Acquisition Corp. (BMY). 19 Davreyn was terminated
                                     and dissolved effective February 27, 2001.
                                        Pursuant to their earlier agreement, Alrey Trust ulti-
                                     mately transferred the Alcoa stock to Deutsche Bank in
                                     exchange for $14,446,020 in net proceeds. 20 On February 20,
                                     2001, Deutsche Bank deposited $14,446,010 of the net sales
                                     proceeds into Alrey Trust’s account. 21 Also on that day, Alrey
                                     Trust, at the direction of Mr. Austin, transferred $16,139,452
                                     from its account at First Union to an account at ABN Amro
                                     Bank N.V., held under the name MeesPierson (Bahamas)
                                     Ltd. Alrey Trust designated this amount as a ‘‘loan repay-
                                     ment’’. After the transfer Alrey Trust’s First Union bank
                                     account had a balance of $679,504.
                                        Between April 2001 and June 2003 a number of payments
                                     were made from Alrey Trust’s First Union bank account to
                                           19 Mr.
                                               Austin signed the assignment of shares document in his capacity
                                     as trustee of Sunny Capital and as chairman of Alrey Acquisition.
                                       20 The gross proceeds from the sale were $14,544,867. Deutsche Bank

                                     calculated the net proceeds by eliminating from the gross proceeds the fol-
                                     lowing amounts: (1) commissions of $98,359, (2) a Securities and Exchange
                                     Commission fee of $485, and (3) a handling fee of $3.
                                       21 The $14,446,010 figure is equal to the net proceeds from Alrey Trust’s

                                     sale of the Alcoa stock, minus a wire transfer fee of $10.




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                                     330                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     various entities and individuals, including BDO Seidman,
                                     WC Investments, Inc., 22 Emil Pesiri, 23 Bingham Dana LLP,
                                     Sonnenschein, Cooper, Brown & Behrle, First Union,
                                     Vandalia, LLC, ICA, and Starwalker Group, LLC
                                     (Starwalker). 24 On June 19, 2003, Alrey Trust’s First Union
                                     bank account was closed.
                                     V. Tax Reporting
                                           A. Petitioner Trusts
                                        Each petitioner trust timely filed a Form 1041, U.S.
                                     Income Tax Return for Estates and Trusts, for 2001. Mr.
                                     Griffin prepared petitioner trusts’ Forms 1041. On a
                                     Schedule D, Capital Gains and Losses, attached to its Form
                                     1041 the Reynolds Trust reported a $2,664,196 gain from the
                                     stock sale. On Schedules D attached to their Forms 1041, the
                                     Swords Trust, the Mackell Trust, and the Brotherton Trust
                                     each reported a $3,628,247 gain from the sale of the Davreyn
                                     common stock and from the redemption of Davreyn stock
                                     relating to the Goldman Sacks fund shares. For 2001 peti-
                                     tioner trusts paid Federal income tax as follows: Reynolds
                                     Trust—$532,722, Swords Trust—$726,356, Mackell Trust—
                                     $726,555, and Brotherton Trust—$726,544.
                                           B. Davreyn
                                       On September 30, 2002, Davreyn mailed to respondent a
                                     Form 1120, U.S. Corporation Income Tax Return, for the
                                     period January 1 to February 15, 2001. 25 Mr. Teig prepared
                                     the Form 1120 and Mr. Austin executed it.
                                       On the Form 1120 Davreyn reported total income of
                                     $558,440, including dividends of $61,475, interest of $24, and
                                     capital gains of $496,941. On an attached Schedule D
                                     Davreyn reported a short-term capital gain of $496,941
                                     attributable to the sale of the ‘‘investment in Davreyn LLC’’.
                                     Davreyn reported a basis in the Davreyn LLC investment of
                                        22 WC Investments, Inc., was owned by George Theofel. Mr. Theofel was

                                     a former employee and/or representative of ICA.
                                        23 Mr. Pesiri was a former employee and/or representative of ICA.
                                        24 Starwalker was an entity established and owned by Mr. Austin. Mr.

                                     Austin served as president of Starwalker during the relevant period.
                                        25 Before the transactions at issue Davreyn used a TYE December 31 for

                                     financial and tax accounting purposes.




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                                     (317)                     SWORDS TRUST v. COMMISSIONER                                        331


                                     $1,076,530 and a sale price of $1,573,471, and a Federal
                                     income tax liability of $37,560, on its Form 1120.
                                           C. Alrey Trust
                                       Alrey Trust filed a Form 1041 for the taxable year begin-
                                     ning February 7, 2001, and ended January 31, 2002. Alrey
                                     Trust attached to its Form 1041 a grantor letter identifying
                                     Alrey Acquisition as its grantor. The grantor letter reported
                                     a long-term capital gain of $13,424,010, arising from the sale
                                     of 409,830 shares of Alcoa stock. The grantor letter stated
                                     that: (1) Alrey Trust acquired the Alcoa stock on December
                                     14, 1961, (2) Alrey Trust had a basis in the Alcoa stock of
                                     $1,022,000, (3) Alrey Trust sold the Alcoa stock on February
                                     15, 2001, for a gross sale price of $14,446,010, and (4) Alrey
                                     Trust’s income, deductions, and credits would be reported on
                                     Alrey Acquisition’s Federal income tax return.
                                           D. Alrey Acquisition
                                        Alrey Acquisition filed a Form 1120 for the taxable year
                                     beginning February 6, 2001, and ended January 31, 2002. On
                                     its Form 1120 Alrey Acquisition reported interest income of
                                     $10,506 and a net loss of $615,543, for a total taxable loss
                                     of $605,037 and total tax of zero. On an attached Schedule
                                     D Alrey Acquisition reported long-term capital gain from its
                                     passthrough entities of $13,424,010 and a short-term capital
                                     loss of $13,727,689, resulting from its sale of the BMY
                                     stock. 26
                                       26 With respect to the BMY stock, Alrey Acquisition reported a basis of

                                     $13,744,939 and a sale price of $17,250. Alrey Acquisition reported that it
                                     acquired the BMY stock on February 15, 2001, and that it sold the BMY
                                     stock on December 17, 2001.
                                       Respondent has alleged that Alrey Acquisition’s sale of the Alcoa stock
                                     and the BMY stock were parts of a Son-of-BOSS transaction. A Son-of-
                                     BOSS transaction can be summarized as follows:
                                           [A] variation of a slightly older alleged tax shelter known as BOSS, an
                                           acronym for ‘‘bond and options sales strategy.’’ There are a number of
                                           different types of Son-of-BOSS transactions, but what they all have in
                                           common is the transfer of assets encumbered by significant liabilities to
                                           a partnership, with the goal of increasing basis in that partnership. The
                                           liabilities are usually obligations to buy securities, and typically are not
                                           completely fixed at the time of transfer. This may let the partnership
                                           treat the liabilities as uncertain, which may let the partnership ignore
                                                                                                       Continued




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                                     332                  142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     VI. Audit of Alrey Acquisition and Davreyn
                                        In June 2005 the Internal Revenue Service (IRS) began an
                                     examination of Alrey Acquisition. As a result of the examina-
                                     tion respondent issued to Alrey Acquisition a notice of defi-
                                     ciency disallowing its claimed losses from the BMY stock
                                     sale. By letters dated August 8, 2006, respondent informed
                                     petitioner trusts that respondent had examined their poten-
                                     tial transferee liability with respect to Alrey Acquisition and
                                     determined that a transferee examination would not proceed.
                                        In June 2006 the IRS began an examination of Davreyn.
                                     After examining Davreyn’s Form 1120 respondent deter-
                                     mined that the purported sale of Davreyn’s stock to Alrey
                                     Trust should be recharacterized as a sale of assets by
                                     Davreyn followed by a distribution of Davreyn’s assets to its
                                     shareholders in liquidation. On the basis of this determina-
                                     tion respondent increased Davreyn’s long-term capital gain
                                     by $13,444,080 and determined a deficiency in its Federal
                                     income tax of $4,602,986.
                                     VII. Notice of Deficiency, Assessment, and Collection
                                       Respondent mailed to Davreyn a notice of deficiency dated
                                     September 23, 2008, for its TYE February 15, 2001. In the
                                     notice of deficiency respondent determined a deficiency in
                                     Davreyn’s Federal income tax of $4,602,986, an addition to
                                     tax under section 6651(a)(1) of $1,160,137, an accuracy-
                                     related penalty under section 6662 of $920,597, and accrued
                                     interest of $3,807,128.
                                       Davreyn did not file a petition in this Court contesting
                                     respondent’s determinations. Accordingly, respondent treated
                                     the notice of deficiency as defaulted and, on January 14,
                                     2009, assessed Davreyn’s tax deficiency of $4,602,986, as well
                                     as additions to tax under section 6651(a)(1) and (2) of
                                     $1,160,137 and $1,982, respectively, an accuracy-related pen-
                                     alty under section 6662 of $920,597, and related interest.



                                           them in computing basis. If so, the result is that the partners will have
                                           a basis in the partnership so great as to provide for large—but not out-
                                           of-pocket—losses on their individual tax returns. [Kligfeld Holdings v.
                                           Commissioner, 128 T.C. 192, 194 (2007).]




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                                     (317)                     SWORDS TRUST v. COMMISSIONER                                        333


                                     VIII. Notices of Liability
                                        On February 25, 2010, respondent sent notices of liability
                                     to petitioner trusts. In the notices of liability respondent
                                     identified Davreyn as the transferor with an unpaid Federal
                                     income tax liability of $4,602,986, plus additions to tax, an
                                     accuracy-related penalty, fees, and interest, for a total
                                     liability of $10,753,478. Respondent determined each peti-
                                     tioner trust’s individual transferee liability on the basis of
                                     the total amount each petitioner trust received in the stock
                                     redemption and stock sale. 27
                                        In attached statements respondent advised petitioner
                                     trusts that the IRS did not recognize their purported stock
                                     sale transactions with Alrey Trust. The statements further
                                     advised that the amounts petitioner trusts received for the
                                     purported stock sales would be attributable to them ‘‘in liq-
                                     uidation or distribution of assets of Davreyn Corporation on
                                     or around’’ February 15, 2001. The statements further
                                     explained that the purported stock sale transactions were
                                     ‘‘substantially similar to an Intermediary transaction tax
                                     shelter described in Notice 2001–16 and Notice 2008–111.’’
                                                                                   OPINION

                                     I. Overview
                                       These cases involve several transactions which respondent
                                     now seeks to reconfigure in a way that makes the assets of
                                     petitioner trusts a source of collection for tax liabilities origi-
                                     nally imposed on Alrey Trust and Alrey Acquisition. In
                                     simple terms, Alrey Trust purchased all of the Davreyn stock
                                     from petitioner trusts so that it could acquire Davreyn’s then
                                     principal asset, Alcoa stock. With the benefit of hindsight, it
                                     now appears that Alrey Trust and Alrey Acquisition were
                                     established to participate in a preplanned series of inter-
                                     related transactions designed to illegitimately avoid tax on
                                           27 Respondentcalculated each petitioner trust’s individual transferee li-
                                     ability as follows: (1) for the Reynolds Trust, respondent determined trans-
                                     feree liability of $2,710,241, consisting of $2,673,431 in cash received and
                                     $36,810 in fees paid to professional advisers and (2) for each of the Swords
                                     Trust, the Mackell Trust, and the Brotherton Trust, respondent deter-
                                     mined transferee liability of $3,833,988, consisting of $3,416,891 in cash
                                     received, $370,050 attributable to the transfer of the membership interests
                                     in Davreyn LLC, and $47,047 in fees paid to professional advisers.




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                                     334                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     Alrey Trust’s sale of Davreyn’s Alcoa stock, which it had
                                     acquired as a liquidating distribution. Alrey Trust sold the
                                     Alcoa stock incident to receiving it and reported that the
                                     substantial gain on the sale was offset by an artificial loss
                                     resulting from what appears to have been a Son-of-BOSS
                                     transaction by Alrey Acquisition, the grantor of Alrey Trust.
                                        After assessing substantial tax liabilities against Alrey
                                     Trust, Alrey Acquisition, and Davreyn, respondent now con-
                                     tends that petitioner trusts’ sales of their Davreyn stock were
                                     part of a plan by petitioner trusts to illegitimately avoid cor-
                                     porate tax on the distribution of the Alcoa stock in liquida-
                                     tion of Davreyn. Respondent contends that his collection of
                                     the tax from petitioner trusts is under the authority of sec-
                                     tion 6901. The Commissioner has likewise relied upon that
                                     section to attempt to collect tax from claimed transferees in
                                     other similar cases which have recently come before this
                                     Court. See, e.g., Hawk v. Commissioner, T.C. Memo. 2012–
                                     154; Salus Mundi Found. v. Commissioner, T.C. Memo.
                                     2012–61, vacated and remanded sub nom. Diebold Found.,
                                     Inc. v. Commissioner, 736 F.3d 172 (2d Cir. 2013); Slone v.
                                     Commissioner, T.C. Memo. 2012–57; Sawyer Trust of May
                                     1992 v. Commissioner, T.C. Memo. 2011–298, rev’d and
                                     remanded, 712 F.3d 597 (1st Cir. 2013); Feldman v. Commis-
                                     sioner, T.C. Memo. 2011–297, appeal docketed, No. 12–3144
                                     (7th Cir. Sept. 18, 2012); Starnes v. Commissioner, T.C.
                                     Memo. 2011–63, aff ’d, 680 F.3d 417 (4th Cir. 2012). This
                                     Court concluded in all but one of those cases that the
                                     Commissioner’s reliance on section 6901 to impose transferee
                                     liability upon the claimed transferees was wrong. See Salus
                                     Mundi Found. v. Commissioner, T.C. Memo. 2012–61
                                     (decisions entered against the Commissioner); Slone v.
                                     Commissioner, T.C. Memo. 2012–57 (decisions entered
                                     against the Commissioner); Sawyer Trust of May 1992 v.
                                     Commissioner, T.C. Memo. 2011–298 (decision entered
                                     against the Commissioner); Feldman v. Commissioner, T.C.
                                     Memo. 2011–297 (decisions entered for the Commissioner);
                                     Starnes v. Commissioner, T.C. Memo. 2011–63 (decisions
                                     entered against the Commissioner). 28 The Court of Appeals
                                       28 In Hawk v. Commissioner, T.C. Memo. 2012–154, the Court denied the

                                     taxpayers’ motion for summary judgment, concluding that genuine issues
                                     of material fact remained in dispute as to whether they were liable as




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        335


                                     for the Fourth Circuit affirmed our judgment in Starnes v.
                                     Commissioner, 680 F.3d 417, but the Courts of Appeals for
                                     the First and Second Circuits did not do likewise in the
                                     Salus Mundi Found. and the Sawyer Trust of May 1992
                                     cases. See Diebold Found., Inc. v. Commissioner, 736 F.3d
                                     172; Sawyer Trust of May 1992 v. Commissioner, 712
                                     F.3d 597. This Court subsequently determined upon remand
                                     from the Court of Appeals for the First Circuit that the dis-
                                     puted transferee in the Sawyer Trust of May 1992 case was
                                     liable under section 6901 as a transferee of a transferee but
                                     concluded that the liability was less than the Commissioner
                                     had determined. See Sawyer Trust of May 1992 v. Commis-
                                     sioner, T.C. Memo. 2014–59. 29 We decide the issue at hand
                                     with this overview in mind.
                                     II. Section 6901(a)
                                        Section 6901(a) provides that the Commissioner may pro-
                                     ceed against a transferee of property to assess and collect
                                     Federal income tax, penalties, and interest owed by the
                                     transferor (sometimes collectively, transferor’s unpaid taxes).
                                     See also sec. 301.6901–1(a), Proced. & Admin. Regs. A trans-
                                     feree under section 6901 includes, among other persons, a
                                     shareholder of a dissolved corporation. See sec. 301.6901–
                                     1(b), Proced. & Admin. Regs. Section 6901 does not impose
                                     liability on the transferee but merely gives the Commissioner
                                     a procedure to collect the transferor’s existing liability.
                                     Commissioner v. Stern, 357 U.S. 39, 42 (1958).
                                        The Commissioner may collect the transferor’s unpaid tax
                                     from the transferee if an independent basis exists under
                                     applicable State law or State equity principles for holding the
                                     transferee liable for the transferor’s debts. Sec. 6901(a);
                                     Commissioner v. Stern, 357 U.S. at 45; Hagaman v. Commis-
                                     sioner, 100 T.C. 180, 183 (1993); Starnes v. Commissioner,
                                     T.C. Memo. 2011–63, slip op. at 15. State law determines the
                                     elements of liability, and section 6901 provides the remedy or
                                     procedure to be employed by the Commissioner as the means

                                     transferees under sec. 6901.
                                       29 This Court has yet to decide Salus Mundi Found. v. Commissioner,

                                     T.C. Memo. 2012–61, vacated and remanded sub nom. Diebold Found., Inc.
                                     v. Commissioner, 736 F.3d 172 (2d Cir. 2013), following its remand from
                                     the Court of Appeals for the Second Circuit.




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                                     336                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     of enforcing that liability. Ginsberg v. Commissioner, 305
                                     F.2d 664, 667 (2d Cir. 1962), aff ’g 35 T.C. 1148 (1961);
                                     Starnes v. Commissioner, T.C. Memo. 2011–63, slip op. at 15.
                                     The applicable State law is the law of the State where the
                                     transfer occurred. See Commissioner v. Stern, 357 U.S. at 45;
                                     Starnes v. Commissioner, 680 F.3d at 426.
                                        In sum, section 6901 allows the Commissioner to collect a
                                     taxpayers’s unpaid tax from another person if three condi-
                                     tions are met. First, the taxpayer must be liable for the
                                     unpaid tax. Second, the other person must be a ‘‘transferee’’
                                     within the meaning of section 6901. Third, an independent
                                     basis must exist under applicable State law or State equity
                                     principles for holding the other person liable for the tax-
                                     payer’s unpaid tax. Accord Diebold Found., Inc. v. Commis-
                                     sioner, 736 F.3d at 183–184; Sawyer Trust of May 1992 v.
                                     Commissioner, 712 F.3d at 604–605. Section 6901 does not
                                     apply if one or more of these three conditions is not met.
                                     Accord Commissioner v. Stern, 357 U.S. 39; Diebold Found.,
                                     Inc. v. Commissioner, 736 F.3d at 183–184; Sawyer Trust of
                                     May 1992 v. Commissioner, 712 F.3d at 604–605; Starnes v.
                                     Commissioner, 680 F.3d at 430.
                                     III. Burden of Proof
                                        Section 6902(a) provides that in this Court the Commis-
                                     sioner bears the burden of proving that a person is liable as
                                     a transferee. See also Rule 142(a), (d). Section 6902(a) fur-
                                     ther provides that the Commissioner does not bear the bur-
                                     den of proving that the transferor was liable for the tax
                                     which the Commissioner seeks to collect by way of section
                                     6901. See also Rule 142(d); cf. Rule 142(a)(1) (generally
                                     stating the well-settled rule of Welch v. Helvering, 290 U.S.
                                     111, 115 (1933), that the Commissioner’s determinations are
                                     presumed to be correct and taxpayers challenging those
                                     determinations bear the burden of proving them wrong).
                                        Petitioners argue that notwithstanding section 6902(a),
                                     respondent bears the burden of proving that Davreyn is
                                     liable for the tax determined in the notice of deficiency. This
                                     is because, petitioners argue, section 7491(a) applies to shift
                                     the burden of proof on that issue to respondent. Pursuant to
                                     section 7491(a), the burden of proof shifts to the Commis-
                                     sioner as to any factual issue relevant to a taxpayer’s




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        337


                                     liability for tax where the taxpayer introduces credible evi-
                                     dence with respect to the issue, sec. 7491(a)(1), and the tax-
                                     payer satisfies certain other conditions, including substan-
                                     tiation of any item and cooperation with the Government’s
                                     requests for witnesses and information, sec. 7491(a)(2); see
                                     also Higbee v. Commissioner, 116 T.C. 438, 440–441 (2001).
                                        We need not and do not decide whether section 7491(a)
                                     applies to shift the burden of proof as petitioners desire. This
                                     is because, as discussed below, we hold that section 6901
                                     does not apply to these cases because the record fails to
                                     establish that an independent basis exists under applicable
                                     State law or State equity principles for holding petitioner
                                     trusts liable for Davreyn’s unpaid tax and that holding would
                                     remain the same even if we decided that Davreyn is liable
                                     for the tax as determined in the notice of deficiency.
                                     IV. Parties’ Arguments
                                        Each party sets forth various arguments in the posttrial
                                     briefs. These arguments include competing views on whether
                                     Davreyn is liable for the tax determined in the notice of defi-
                                     ciency and whether petitioner trusts are ‘‘transferees’’ within
                                     the meaning of section 6901.
                                        As we previously stated, our holding that section 6901 is
                                     inapplicable to these cases would remain the same even if we
                                     decided that Davreyn is liable for the tax determined in the
                                     notice of deficiency. The same would be true if we also
                                     decided that petitioner trusts are ‘‘transferees’’ within the
                                     meaning of section 6901. Given that those two issues have no
                                     effect on our disposition of these cases, we need not and do
                                     not decide those issues in this Opinion. We hereinafter
                                     assume (but do not decide) that Davreyn is liable for the tax
                                     as determined in the notice of deficiency and that petitioner
                                     trusts are ‘‘transferees’’ within the meaning of section 6901,
                                     and we confine our discussion to the parties’ dispute on
                                     whether applicable State law and/or State equity principles
                                     hold petitioner trusts liable for Davreyn’s unpaid Federal
                                     income tax. See also Commissioner v. Stern, 357 U.S. at 41–
                                     42; Sawyer Trust of May 1992 v. Commissioner, 712 F.3d at
                                     604–605; Starnes v. Commissioner, 680 F.3d at 427, 430.
                                        Respondent urges the Court to adopt the following two-step
                                     analysis to determine whether petitioner trusts, as trans-




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                                     338                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     ferees from Davreyn, are liable for Davreyn’s unpaid tax: (1)
                                     analyze whether the subject transactions are recast under
                                     Federal law, here primarily the Federal substance over form
                                     doctrine, and then (2) apply State law to the transactions as
                                     recast under Federal law. One or more transactions are
                                     recast or otherwise disregarded under the Federal substance
                                     over form doctrine where the transactions, taken as a whole,
                                     show that the transactions are shams or have no ‘‘purpose,
                                     substance, or utility apart from their anticipated tax con-
                                     sequences.’’ Goldstein v. Commissioner, 364 F.2d 734, 740 (2d
                                     Cir. 1966), aff ’g 44 T.C. 284 (1965); see also Commissioner v.
                                     Court Holding Co., 324 U.S. 331 (1945); Gregory v. Helvering,
                                     293 U.S. 465, 469–470 (1935); Rice’s Toyota World, Inc. v.
                                     Commissioner, 752 F.2d 89, 95 (4th Cir. 1985), aff ’g on this
                                     issue 81 T.C. 184 (1983). The effect of this doctrine is that
                                     the substance and not the form of the transactions deter-
                                     mines their tax consequences. Commissioner v. Court
                                     Holding Co., 324 U.S. at 333–334; Gregory v. Helvering, 293
                                     U.S. at 469–470; Rice’s Toyota World, Inc. v. Commissioner,
                                     752 F.2d at 95; Lazarus v. Commissioner, 58 T.C. 854, 864
                                     (1972), aff ’d, 513 F.2d 824 (9th Cir. 1975). Alternatively,
                                     respondent contends, petitioner trusts, as transferees from
                                     Davreyn and without regard to the Federal law characteriza-
                                     tion of the transactions, are liable for Davreyn’s debts under
                                     applicable State law or State equity principles. Petitioner
                                     trusts argue that they are not liable for Davreyn’s tax
                                     liability because, they contend, (1) the transactions may be
                                     recast only under applicable State law, which does not pro-
                                     vide for any such recast, and (2) respondent failed to show
                                     that they are liable for Davreyn’s debts under applicable
                                     State law or State equity principles.
                                     V. Respondent’s Proposed Two-Step Analysis
                                       Respondent asks the Court to adopt his referenced two-
                                     step analysis of transferee liability. We decline to do so. The
                                     U.S. Courts of Appeals for the First, Second, and Fourth Cir-
                                     cuits have rejected the Commissioner’s requests to apply that
                                     analysis, see Diebold Found., Inc. v. Commissioner, 736 F.3d
                                     at 184–185; Sawyer Trust of May 1992 v. Commissioner, 712
                                     F.3d at 604–605; Starnes v. Commissioner, 680 F.3d at 428–
                                     429, and we do likewise. In the earliest appellate opinion in




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        339


                                     that trilogy of cases, the U.S. Court of Appeals for the Fourth
                                     Circuit, applying Commissioner v. Stern, 357 U.S. 39, held
                                     that the question of whether a transfer occurred for purposes
                                     of section 6901 was separate from the question of whether
                                     the transfer was fraudulent for State law purposes and con-
                                     cluded that ‘‘Stern forecloses the Commissioner’s efforts to
                                     recast transactions under federal law before applying state
                                     law to a particular set of transactions.’’ Starnes v. Commis-
                                     sioner, 680 F.3d at 428–429. The Courts of Appeals for the
                                     First and Second Circuits subsequently followed suit
                                     espousing similar rationales. See Diebold Found., Inc. v.
                                     Commissioner, 736 F.3d at 185–186 (rejecting the Commis-
                                     sioner’s argument that State law liability is determined on
                                     the basis of a transaction as recast under Federal law);
                                     Sawyer Trust of May 1992 v. Commissioner, 712 F.3d at 604–
                                     605; 30 accord Ewart v. Commissioner, 814 F.2d 321, 324 (6th
                                        30 In Sawyer Trust of May 1992 v. Commissioner, 712 F.3d 597, 604 (1st

                                     Cir. 2013), rev’g and remanding T.C. Memo. 2011–298, the Commissioner
                                     argued that this Court erred by: (1) failing to apply the Federal substance
                                     over form doctrine to determine whether the taxpayer was a transferee be-
                                     fore analyzing the taxpayer’s liability under State law and (2) failing to
                                     find that the taxpayer had constructive knowledge of the buyer’s tax avoid-
                                     ance scheme. The U.S. Court of Appeals for the First Circuit rejected both
                                     arguments. Id. at 604–606. The court found, however, that this Court
                                     failed to analyze whether the taxpayer was liable under a provision of the
                                     Uniform Fraudulent Transfer Act that provides that a transfer is fraudu-
                                     lent ‘‘ ‘if the corporation didn’t receive ‘‘reasonably equivalent value’’ in re-
                                     turn for the transfer and as a result was left with insufficient assets to
                                     have a reasonable chance of surviving’ ’’, even if the taxpayer lacked fraud-
                                     ulent intent. Id. at 606–607 (quoting Boyer v. Crown Stock Distrib., Inc.,
                                     587 F.3d 787, 792 (7th Cir. 2009)). That court remanded the case to this
                                     Court to address that issue. Id. at 606–612. Here, respondent did not
                                     argue in his opening brief that all or any part of the subject transactions
                                     was fraudulent for lack of the receipt of ‘‘reasonably equivalent value’’. Nor
                                     did respondent notify us (or otherwise argue) that the court’s opinion in
                                     Sawyer Trust of May 1992 v. Commissioner, 712 F.3d 597, which was re-
                                     leased after these cases were fully briefed, was pertinent or significant
                                     supplemental authority for our consideration of these cases. The Commis-
                                     sioner, by contrast, did argue in the Starnes case that a transfer was
                                     fraudulent for lack of the receipt of reasonably equivalent value. See, e.g.,
                                     Starnes v. Commissioner, 680 F.3d 417, 430 (4th Cir. 2012), aff ’g T.C.
                                     Memo. 2011–63. In addition, respondent did notify us in these cases that
                                     the Court of Appeals for the Second Circuit decided Diebold Found., Inc.
                                     v. Commissioner, 736 F.3d 172 (2d Cir. 2013), vacating and remanding
                                                                                                      Continued




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                                     340                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     Cir. 1987) (the court, relying in part on Commissioner v.
                                     Stern, 357 U.S. 39, noted that: (1) section 6901 is a purely
                                     procedural statute, and (2) the question of a taxpayer’s sub-
                                     stantive liability is decided on the basis of State law), aff ’g
                                     85 T.C. 544 (1985).
                                        This Court has previously never explicitly adopted or
                                     rejected respondent’s proposed two-step analysis to decide
                                     whether a transaction should be recast under the Federal
                                     substance over form (or similar) doctrine when analyzing
                                     whether a transferee is liable under section 6901. Our
                                     approach, however, has been to require that State law allow
                                     such a transaction to be recast under a substance over form
                                     (or similar) doctrine before doing so. See Salus Mundi Found.
                                     v. Commissioner, slip. op at 25 (‘‘The law of the State where
                                     the transfer occurred (in these cases, New York) controls the
                                     characterization of the transaction.’’); Sawyer Trust of May
                                     1992 v. Commissioner, T.C. Memo. 2011–298, slip op. at 29–
                                     30, 34 (stating that ‘‘[t]he law of the State where the transfer
                                     occurred (in this case, Massachusetts) controls the character-
                                     ization of the transaction’’ and ‘‘[w]hether the transactions
                                     should be ‘collapsed’ is a difficult issue of State law on which
                                     there is fairly limited precedent’’); Starnes v. Commissioner,
                                     T.C. Memo. 2011–63, slip op. at 21–23 (discussing cases
                                     addressing whether certain transactions should be collapsed
                                     under the Uniform Fraudulent Conveyance Acts of the cor-
                                     responding States); see also Diebold Found., Inc. v. Commis-
                                     sioner, 736 F.3d at 184 (stating that this Court accepted
                                     Diebold’s position that under the Commissioner’s proposed
                                     two-step analysis, Federal law may be used to recharacterize
                                     a transaction to determine whether someone is a transferee,
                                     but State law determines whether to recharacterize the
                                     transaction when analyzing the transferee’s liability).

                                     Salus Mundi Found. v. Commissioner, T.C. Memo. 2012–61, after these
                                     cases were briefed. See discussion infra note 33. Given our additional dis-
                                     cussion infra pp. 343–344 that the Sawyer Trust of May 1992 case involved
                                     the Uniform Fraudulent Transfer Act and that Virginia has not adopted
                                     that act (or its predecessor), and that the thrust of respondent’s argument
                                     in these cases is that the Federal substance over form doctrine applies
                                     with full force in determining transferee liability, we conclude that re-
                                     spondent has consciously decided to forgo (or has otherwise waived) any
                                     argument that all or any part of the subject transactions was fraudulent
                                     for lack of the receipt of ‘‘reasonably equivalent value’’.




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        341


                                        Our Memorandum Opinion in Feldman v. Commissioner,
                                     T.C. Memo. 2011–297, does not compel a contrary conclusion.
                                     Accord Slone v. Commissioner, slip op. at 25 n.9 (describing
                                     the facts in Feldman as ‘‘unique’’). The Court in Feldman v.
                                     Commissioner, slip op. at 25–37, applied the Federal sub-
                                     stance over form doctrine to recast a series of transactions
                                     and then, without further explanation, applied State law to
                                     find the taxpayer liable as a transferee with respect to the
                                     recast transaction. Moreover, unlike here (as discussed
                                     below), there the Court found that ‘‘it is absolutely clear that
                                     all individuals involved * * * were aware that * * * [the
                                     buyer] and its representatives had no intention of ever
                                     paying the tax liabilities’’ and that the taxpayer and the
                                     buyer’s financing was a sham transaction. Id. at 14, 19.
                                     VI. Applicability of State Law
                                           A. Overview
                                        Respondent argues alternatively that petitioner trusts are
                                     liable under applicable State law and/or State equity prin-
                                     ciples. In this vein, the parties agree that Virginia law is the
                                     applicable State law for this purpose. Respondent argues
                                     more specifically that the applicable Virginia law is: (1) Va.
                                     Code Ann. sec. 55–80 (2012), which imposes liability on the
                                     grounds of actual fraud, (2) Va. Code Ann. sec. 55–81 (2012),
                                     which imposes liability on the grounds of constructive fraud,
                                     and (3) Virginia’s trust fund doctrine.
                                        We address the referenced statutory provisions and doc-
                                     trine in turn. Before doing so, however, we pause briefly to
                                     address the scope of the transaction to which Virginia law
                                     will be applied.
                                           B. Scope of Transaction
                                        Respondent argues primarily that Federal law sets the
                                     scope of the transaction to which State law is applied. We
                                     disagree for the reasons stated above. Respondent argues
                                     alternatively that Virginia has a substance over form doc-
                                     trine that applies to recast the series of transactions as one
                                     transfer between each of petitioner trusts and Davreyn.
                                     Respondent relies on Burruss Timber Co. v. Frith, 324 S.E.2d
                                     679 (Va. 1985), to support his alternative argument that Vir-




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                                     342                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     ginia has a substance over form doctrine that applies to
                                     these cases.
                                        Where a decision involves the applicability of State law, as
                                     it does here, we, as a Federal court, must apply State law in
                                     the manner that the highest court of the State has indicated
                                     that it would apply the law. See Commissioner v. Estate of
                                     Bosch, 387 U.S. 456, 465 (1967); Estate of Young v. Commis-
                                     sioner, 110 T.C. 297, 300, 302 (1998). If the State’s highest
                                     court has not spoken on the subject, then we must apply
                                     State law as we see it, giving ‘‘proper regard’’ to relevant
                                     rulings of other courts of the State. Commissioner v. Estate
                                     of Bosch, 387 U.S. at 465; see also Estate of Young v.
                                     Commissioner, 110 T.C. at 300, 302. We should follow an
                                     opinion on the subject by an intermediate appellate court of
                                     the State, unless we conclude that the State’s highest court
                                     would decide otherwise. See Commissioner v. Estate of Bosch,
                                     387 U.S. at 465; Estate of Young v. Commissioner, 110 T.C.
                                     at 302.
                                        In the setting at hand, respondent bears the burden of
                                     establishing that the Supreme Court of Virginia, that State’s
                                     highest Court, would apply a substance over form doctrine to
                                     recast the series of transactions as a transfer between each
                                     of petitioner trusts and Davreyn. See Kasishke v. United
                                     States, 426 F.2d 429, 435 (10th Cir. 1970); Bonney v.
                                     Commissioner, 247 F.2d 237, 239 (2d Cir. 1957) (citing
                                     Helvering v. Fitch, 309 U.S. 149, 156 (1940), and Helvering
                                     v. Leonard, 310 U.S. 80, 86 (1940)), aff ’g Towers v. Commis-
                                     sioner, 24 T.C. 199 (1955); Dalton v. Commissioner, 34 T.C.
                                     879, 885 (1960); Farnsworth v. Commissioner, 29 T.C. 1131,
                                     1139 (1958), aff ’d, 270 F.2d 660 (3d Cir. 1959). Respondent
                                     relies erroneously on Burruss Timber Co., 324 S.E.2d 679, to
                                     meet that burden. In Burruss Timber Co., the court consid-
                                     ered whether a real estate broker earned a commission when
                                     he helped sell all of the stock of a corporate landowner,
                                     rather than the specific landowner assets which the broker
                                     was hired to sell. The court analyzed four similar cases from
                                     other jurisdictions and found that in each case, the broker
                                     accomplished a transaction that was ‘‘substantially the
                                     equivalent’’ of selling the assets and, consequently, that dis-
                                     allowing the broker commissions in those cases would have
                                     allowed ‘‘form to triumph over substance.’’ Id. at 681–682.
                                     The court declined to apply a substance over form doctrine




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                                     (317)                     SWORDS TRUST v. COMMISSIONER                                        343


                                     to the transaction in Burruss Timber Co. and concluded that
                                     the broker was not entitled to a commission because the
                                     stock sale was not ‘‘substantially the equivalent’’ of the
                                     assets sale for which he was hired. Id.
                                        In Burruss Timber Co. and in the cases discussed therein,
                                     the courts considered the substance of the transaction only
                                     with respect to the effect of the substance on a third party.
                                     The courts did not consider whether, with respect to the legal
                                     rights and responsibilities of the parties to the transactions
                                     (i.e., the buyer and the seller), the transactions should be col-
                                     lapsed, recast, or disregarded. The Supreme Court of Vir-
                                     ginia’s opinion in Burruss Timber Co. offers no guidance on
                                     whether that court would apply the substance over form doc-
                                     trine described therein to determine the effects of a series of
                                     transactions on the actual parties to the transactions.
                                        Respondent has identified no other Virginia case that
                                     applied a substance over form or similar doctrine. Nor has
                                     respondent argued that the transaction should be collapsed
                                     under Virginia bankruptcy law. 31 While respondent ref-
                                     erences a number of Federal tax cases where a court applied
                                     Federal law to disregard a transaction, those cases are inap-
                                     posite in that they apply Federal law rather than Virginia
                                     State law. Respondent has left us unpersuaded that the
                                     Supreme Court of Virginia would apply a substance over
                                     form analysis to the present setting. 32 This is especially so
                                     given our finding, as discussed herein, that petitioner trusts
                                     (through their trustees) did not as of the time that their
                                           31 In
                                             Sawyer Trust of May 1992 v. Commissioner, T.C. Memo. 2011–298,
                                     slip op. at 34, for example, this Court consulted decisions of bankruptcy
                                     courts to decide which transaction or combinations of transactions should
                                     be considered as the relevant transfer for purposes of the Massachusetts
                                     Uniform Fraudulent Transfer Act. The approach there is supported by the
                                     fact that the Uniform Fraudulent Transfer Act is based on, and consciously
                                     designed to operate in accordance with the fraudulent transfer provisions
                                     in, the Bankruptcy Code. See Prefatory Note, Unif. Fraudulent Transfer
                                     Act (1984), 7A (Part II), U.L.A. 4–7 (2006). As discussed infra p. 344, Vir-
                                     ginia has not adopted the Uniform Fraudulent Transfer Act.
                                        32 Notwithstanding respondent’s citation of a single case from the Su-

                                     preme Court of Virginia, we have independently searched for additional
                                     Virginia cases that could support a conclusion that the Supreme Court of
                                     Virginia would apply a substance over form (or similar) doctrine in the set-
                                     ting at hand. We have not found any case that would lead us to predict
                                     that it would.




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                                     344                  142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     stock was sold have (or have reason to have) any inkling that
                                     the buyer, or someone related thereto, was acting to illegit-
                                     imately avoid the payment of Federal tax. Petitioner trusts
                                     believed that they were simply entering into a sale of their
                                     Davreyn stock with a willing buyer.
                                        We also are unpersuaded that the Supreme Court of Vir-
                                     ginia would apply a substance over form analysis to the
                                     present setting because, as respondent asserts, petitioner
                                     trusts and/or their representatives had actual or constructive
                                     knowledge of Alrey Trust’s plan to sell the Alcoa stock and
                                     to illegitimately avoid any resulting tax liability. Simply put,
                                     the record at hand does not lead us to find that assertion as
                                     a fact. Cf. Diebold Found., Inc. v. Commissioner, 736 F.3d at
                                     187–190 (court concluded that shareholders had knowledge of
                                     illegitimate plan). After these cases were briefed, the Court
                                     of Appeals for the Second Circuit decided Diebold Found.,
                                     Inc. v. Commissioner, 736 F.3d 172. There, the court col-
                                     lapsed the series of transactions and found that there was a
                                     conveyance under the applicable State statute, the New York
                                     Uniform Fraudulent Conveyance Act, because, the court con-
                                     cluded, the taxpayers constructively knew of the entire
                                     scheme to illegitimately avoid tax. Id. at 187–190. Neither
                                     party has requested additional briefing in these cases in the
                                     light of Diebold Found., Inc., 33 and we conclude that Diebold
                                     Found., Inc. is factually distinguishable from these cases for
                                     three reasons. First, while New York law reflects an adoption
                                     of the Uniform Fraudulent Conveyance Act, Virginia has not
                                     adopted that act (or its successor the Uniform Fraudulent
                                     Transfer Act) for the relevant period. See Grupo Mexicano de
                                     Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308,
                                     324 n.7 (1999); Zazzali v. Swenson (In re DBSI, Inc.), 463
                                     B.R. 709, 718–719 (Bankr. D. Del. 2012); In re Best Prods.
                                     Co., 168 B.R. 35, 52 (Bankr. S.D.N.Y. 1994). See generally
                                     Isaac A. McBeth & Landon C. Davis III, ‘‘Bulls, Bears, and
                                           33 Respondent
                                                      filed a notice of supplemental authority referencing
                                     Diebold Found., Inc. v. Commissioner, 736 F.3d 172, and petitioners re-
                                     sponded to that notice. Respondent acknowledged in his notice that the rel-
                                     evant State laws in Diebold Found., Inc. and in these cases are different
                                     (New York and Virginia, respectively) and made no attempt to harmonize
                                     the relevant New York law with Virginia law. Petitioners agree that the
                                     relevant laws are different and conclude further that the laws are irrecon-
                                     cilable.




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        345


                                     Pigs: Revisiting the Legal Minefield of Virginia Fraudulent
                                     Transfer Law’’, 46 U. Rich. L. Rev. 273, 274 n.8 (2011–2012);
                                     id. at 276, 293 (stating that ‘‘as a general matter, the provi-
                                     sions of the UFTA provide greater protection to creditors
                                     than Virginia’s fraudulent transfer statutes’’ and analyzing
                                     ‘‘the UFTA provisions in comparison to their Virginia
                                     counterparts and the UFTA provisions that have no Virginia
                                     counterparts, so as to identify differences between the two
                                     bodies of fraudulent transfer law’’). Second, we are unaware
                                     of (and respondent has not cited) a Virginia case that applies
                                     a collapsing doctrine similar to the New York doctrine
                                     applied in Diebold Found., Inc. Third, even if respondent
                                     relied upon such a doctrine, we find, contrary to the setting
                                     in Diebold Found., Inc., that neither petitioner trusts nor
                                     their representatives knew (either actually or constructively)
                                     of a scheme to avoid the tax liability in issue. 34
                                        As to the third point, respondent invites the Court to con-
                                     clude that petitioner trusts were knowing participants in
                                     planning the series of transactions that respondent main-
                                     tains included the sale by petitioner trusts of Davreyn stock
                                     and that they therefore are liable for the unpaid tax
                                     resulting from the plan. We decline that invitation. In fact,
                                     the testimony of Ms. Swords, Ms. Mackell, and Ms.
                                     Brotherton convinces us to make contrary findings; i.e., that
                                     there was no plan by petitioner trusts to illegitimately avoid
                                       34 The third point also persuades us that the Supreme Court of Virginia

                                     would not collapse the transactions at issue in accordance with a certain
                                     rationale espoused in LaRosa v. LaRosa, 482 Fed. Appx. 750, 2012 WL
                                     1499522 (4th Cir. 2012), and Starnes v. Commissioner, 680 F.3d 417. In
                                     LaRosa, 482 Fed. Appx. at 755 n.3, the court noted in its application of
                                     West Virginia law that a court may collapse a series of transactions into
                                     a single integrated transaction. The court cited Official Comm. of Unse-
                                     cured Creditors of Sunbeam Corp. v. Morgan Stanley & Co. (In re Sunbeam
                                     Corp.), 284 B.R. 355, 370 (Bankr. S.D.N.Y. 2002), which stands for the
                                     proposition that a series of transactions may be collapsed if the trans-
                                     actions were linked and the transferee had actual or constructive knowl-
                                     edge of the entire scheme. LaRosa, 482 Fed. Appx. 750. In Starnes v. Com-
                                     missioner, 680 F.3d at 433, the court, in applying North Carolina law, stat-
                                     ed that in deciding whether to collapse transactions in transferee liability
                                     cases, the question is whether the taxpayer had actual or constructive
                                     knowledge that the sold corporation would become delinquent on its taxes.
                                     We also note that the relevant law in LaRosa and Starnes was that of
                                     West Virginia and North Carolina, respectively, while the relevant law
                                     here is that of Virginia.




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                                     346                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     tax, that petitioner trusts had neither actual nor constructive
                                     knowledge of Alrey Trust’s plan to sell the Alcoa stock and
                                     to illegitimately avoid any resulting tax liability, that peti-
                                     tioner trusts were not aware of circumstances that should
                                     have led them to make further inquiry regarding Alrey
                                     Trust’s postclosing plans, and that petitioner trusts had nei-
                                     ther actual nor constructive knowledge that Alrey Trust
                                     would cause Davreyn to become delinquent on its taxes. The
                                     testimony of Ms. Swords, Ms. Mackell, and Ms. Brotherton
                                     emphasized that they were unaware of the financial buyer’s
                                     identity and the reasons a financial buyer would want to
                                     purchase Davreyn’s stock and that they relied on the advice
                                     of their accountants and lawyers. Ms. Swords, Ms. Mackell,
                                     and Ms. Brotherton each testified that they did not pre-
                                     viously try to sell or liquidate Davreyn. Ms. Mackell testified
                                     that petitioner trusts did not consider selling Davreyn until
                                     Mr. Griffin and Mr. Rohman approached petitioner trusts in
                                     2000 regarding the potential sale of their Davreyn stock. Ms.
                                     Swords and Ms. Mackell both testified that petitioner trusts
                                     sold their Davreyn stock to Alrey Trust on the basis of their
                                     advisers’ recommendation. Ms. Swords, Ms. Mackell, and Ms.
                                     Brotherton repeatedly emphasized their complete trust in
                                     their advisers, particularly Mr. Griffin. Ms. Swords, Ms.
                                     Mackell, and Ms. Brotherton each testified that they did not
                                     know the identity of Davreyn’s buyer and that they were not
                                     aware that the buyer planned to sell Davreyn’s Alcoa stock
                                     and/or dissolve Davreyn. We find all of this testimony to be
                                     credible.
                                        In addition, as to the potential tax consequences of liqui-
                                     dating Davreyn rather than selling its stock, Ms. Brotherton
                                     testified that it was not advantageous for petitioner trusts to
                                     liquidate Davreyn because doing so would subject her, Mr.
                                     Reynolds, and Ms. Swords and Ms. Mackell to two levels of
                                     taxation. Ms. Mackell testified further that she and her sis-
                                     ters did not consider liquidating Davreyn because they knew
                                     petitioner trusts would incur significant tax liabilities. Again,
                                     we find this testimony to be credible.
                                        In Slone v. Commissioner, slip op. at 23–24, the Court con-
                                     cluded that the taxpayer was aware of the target corpora-
                                     tion’s tax liabilities with respect to the asset sale and that
                                     the acquiring corporation planned to offset gains resulting
                                     from the asset sale. The taxpayer was unaware, however,




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        347


                                     that the acquiring corporation planned to offset gains
                                     through an illegitimate scheme. Id. Here, Ms. Swords, Ms.
                                     Mackell, and Ms. Brotherton did not know that Alrey Trust
                                     planned to sell the Alcoa stock and generate a significant tax
                                     liability, and they were unaware that Alrey Trust, through
                                     Alrey Acquisition, planned to offset any tax liability with
                                     respect to Davreyn and/or to its assets.
                                        Respondent emphasizes the fact that Mr. Rohman referred
                                     to the buyer’s ‘‘peculiar tax situation’’ in a memorandum to
                                     Ms. Swords, Ms. Mackell, and Ms. Brotherton. Respondent
                                     asks us to infer from this single phrase that petitioner trusts
                                     were aware of Alrey Acquisition’s plan to illegitimately avoid
                                     the payment of tax on the Alcoa stock sale gain. We are not
                                     prepared to draw such an inference. Mr. Rohman testified
                                     that he included this phrase as a reference to the fact that
                                     the buyer had losses or anticipated generating losses. As this
                                     Court noted in Sawyer Trust of May 1992 v. Commissioner,
                                     T.C. Memo. 2011–298, slip op. at 37, 45, and in Slone v.
                                     Commissioner, slip op. at 24, legitimate transactions may be
                                     available to offset built-in gain, if recognized, and a taxpayer
                                     may contemplate the execution of such a transaction. Accord-
                                     ingly, we will not infer from Mr. Rohman’s use of the phrase
                                     ‘‘peculiar tax situation’’ that petitioner trusts were aware of
                                     the details of Alrey Trust’s tax situation or that petitioner
                                     trusts knew about, and agreed to facilitate, an illegal tax
                                     avoidance scheme. Because petitioner trusts did not know of,
                                     approve, or have reason to suspect the multistep plan by
                                     Alrey Acquisition and related entities to liquidate Davreyn,
                                     to sell the Alcoa stock, and to attempt to illegitimately avoid
                                     the tax on that sale by engaging in what likely was a Son-
                                     of-BOSS transaction involving BMY stock, we decline to re-
                                     configure the sale by petitioner trusts of their Davreyn stock
                                     as respondent contends we should. We find to the contrary
                                     that petitioner trusts had no plan to enable Davreyn, Alrey
                                     Trust, or Alrey Acquisition to illegitimately avoid tax and
                                     that they engaged in an arm’s-length sale of Davreyn’s stock.
                                     Accord Sawyer Trust of May 1992 v. Commissioner, T.C.
                                     Memo. 2011–298, slip op. at 44–45.
                                        Respondent contends that even if we conclude (which we
                                     do) that petitioner trusts and their trustees had no plan to
                                     enable Davreyn, Alrey Trust, and/or Alrey Acquisition to
                                     illegitimately avoid tax, petitioner trusts, through their rep-




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                                     348                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     resentatives Mr. Griffin and Mr. Rohman, knew that Alrey
                                     Trust planned to offset the gain from the Alcoa stock sale
                                     and that the offset was the reason Alrey Trust was
                                     interested in purchasing Davreyn. The record does not sup-
                                     port this contention, and we decline to find it as a fact. Nei-
                                     ther Ms. Swords, Ms. Mackell, nor Ms. Brotherton has a
                                     background in business or in tax, and we find that given
                                     their lack of business experience, it was not unreasonable for
                                     them to rely on the advice of their representatives that the
                                     stock sale transaction constituted a legitimate transaction.
                                     See, e.g., Starnes v. Commissioner, 680 F.3d at 436–437.
                                     Moreover, we are not persuaded that any of the representa-
                                     tives knew (either actually or constructively) of the plan to
                                     illegitimately avoid tax on the Alcoa stock sale. Mr. Griffin
                                     credibly testified that he did not know the identity of the
                                     buyer or why the buyer wanted to purchase Davreyn stock.
                                     He testified that he did not discuss the buyer’s identity or
                                     tax situation with Mr. Rohman. Mr. Griffin also testified that
                                     at the time of the sale, he did not know that the buyer was
                                     planning to liquidate Davreyn or that the buyer planned to
                                     sell Davreyn’s Alcoa stock to Deutsche Bank.
                                        Mr. Rohman’s testimony about the state of his knowledge
                                     is not quite so satisfying; he openly acknowledged that he did
                                     not know or inquire as to why ICA wanted to acquire PHCs
                                     like Davreyn. To his credit, however, he also testified that he
                                     understood that the buyer had losses or anticipated losses.
                                     He apparently came to this understanding on the basis of a
                                     conversation that took place before the closing with Mr.
                                     Glazman, Mr. Gottlieb, or Mr. Teig. While Mr. Rohman
                                     assumed that the buyer would want to offset these losses
                                     with gain, he testified that he was not given any information
                                     regarding the buyer’s losses and that he had no reason to
                                     question the legitimacy of the buyer’s losses. In addition,
                                     while Mr. Rohman had structured previous sales similar to
                                     the transactions at issue, the record does not persuade us
                                     that he knew that any of the buyers in those transactions
                                     would cause the PHC to liquidate its stock and attempt to
                                     illegitimately avoid Federal income tax that would be
                                     imposed as to the stock. While the lack of due diligence by
                                     Mr. Rohman with respect to the buyer’s identity and reputa-
                                     tion is problematic, he adequately explained to us that he
                                     trusted ICA because ICA was represented by a good national




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        349


                                     law firm and a respected international accounting firm and
                                     First Union, Alrey Trust’s trustor, was a reputable financial
                                     institution. He also persuaded us that petitioner trusts had
                                     no plan to undertake any steps except to sell Davreyn’s stock
                                     to the buyer.
                                        This Court in other transferee liability cases has consid-
                                     ered similar arguments regarding the knowledge of the tax-
                                     payer seller’s representatives and has rejected them where
                                     the evidence was insufficient to prove that the taxpayer
                                     seller knew of the buyer’s plan to illegitimately avoid tax. In
                                     Slone v. Commissioner, slip op. at 23–24, for example, the
                                     taxpayers’ attorney sent a memorandum to another of the
                                     taxpayers’ attorneys, explaining that the buyer planned to
                                     offset the gain from the sale of the purchased corporation’s
                                     assets by contributing to the nominal buyer assets with a
                                     high basis and low value, then selling those assets at a loss
                                     before the end of the taxable year. The Court concluded that
                                     this memorandum was insufficient to show that the tax-
                                     payers knew of the corporate buyer’s illegitimate scheme. Id.
                                     at 24.
                                        It is clear from Mr. Rohman’s testimony that he at least
                                     suspected that the buyer would sell the Alcoa stock and
                                     offset the gain from that sale with other losses. It is likely
                                     that Mr. Griffin, an educated tax professional, also consid-
                                     ered such a possibility. There is no credible evidence, how-
                                     ever, that either petitioner trusts or their representatives
                                     knew about any plan on the part of the buyer to illegit-
                                     imately avoid the payment of tax on the sale of Davreyn’s
                                     Alcoa stock, and the representatives’ knowledge that an
                                     unrelated buyer planned to offset any gain from a sale of the
                                     Alcoa stock with incurred or anticipated losses is insufficient
                                     to show the existence of a preconceived plan by petitioner
                                     trusts to illegitimately avoid tax. This Court has acknowl-
                                     edged that there are legitimate tax planning strategies
                                     involving built-in gains and losses and that it was not
                                     unreasonable, in the absence of contradictory information, for
                                     the representatives to believe that the buyer had a legitimate
                                     tax planning method. See id.; Sawyer Trust of May 1992 v.
                                     Commissioner, T.C. Memo. 2011–298, slip op. at 37, 45. We
                                     find that while Mr. Rohman and Mr. Griffin knew or had
                                     reason to believe that the buyer of petitioner trusts’ stock
                                     had tax attributes that made the purchase of the stock




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                                     350                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     attractive, Mr. Rohman and Mr. Griffin did not know or have
                                     reason to know that any such tax attributes were improper
                                     or that the buyer intended to liquidate Davreyn and to
                                     illegitimately avoid any resulting tax liability. 35 We also find
                                     that neither Mr. Rohman nor Mr. Griffin was aware of any
                                     circumstance that would have caused him to inquire further
                                     into the circumstances of the transaction, which Mr. Rohman
                                     considered to be a simple stock sale. 36
                                        In sum, we reject respondent’s contention that the trans-
                                     actions at issue should be recast by applying a Virginia sub-
                                     stance over form doctrine and decline to collapse the trans-
                                     actions into a single integrated transaction. Instead, we find
                                     on the basis of the record at hand that the sale by petitioner
                                     trusts of the Davreyn stock to Alrey Trust was in form and
                                     in substance a sale of stock and that the transaction should
                                     not be recast as a sale of assets followed by a distribution in
                                     liquidation. We proceed to evaluate each relevant transaction
                                        35 We are not unmindful of Notice 2001–16, 2001–1 C.B. 730, which was

                                     released on January 19, 2001, and was formerly published in the Internal
                                     Revenue Manual on February 26, 2001. The stock sale transaction at issue
                                     occurred on February 15, 2001, after the release date but before the publi-
                                     cation date. While Mr. Griffin and Mr. Rohman were aware of this notice,
                                     they credibly explained to us that they did not believe that it pertained
                                     to the Davreyn transaction. We also note that this Court has declined to
                                     find taxpayers liable as transferees with respect to similar transactions
                                     where the transaction occurred both before issuance of Notice 2001–16,
                                     supra, see Salus Mundi Found. v. Commissioner, T.C. Memo. 2012–61, and
                                     after its issuance, see Starnes v. Commissioner, T.C. Memo. 2011–63.
                                        36 In Diebold Found., Inc. v. Commissioner, 736 F.3d at 188, the Court

                                     of Appeals for the Second Circuit concluded that this Court erred in find-
                                     ing that the taxpayers’ representatives were not required to make further
                                     inquiry into the circumstances of the transaction. To that end, the Court
                                     noted that the taxpayers were sophisticated and well-represented persons
                                     who recognized the significant tax liability arising from the built-in gains
                                     and specifically sought out multiple persons to help them minimize that
                                     liability. Id. The court also noted that the taxpayers’ representatives ‘‘had
                                     a sophisticated understanding of the structure of the entire transaction’’
                                     and had actively participated in implementing the transaction. Id. at 188–
                                     189. The case of Diebold Found., Inc. is factually distinguishable from
                                     these cases as to this point. Or put differently, respondent has simply not
                                     persuaded us that a reasonably diligent person in the setting at hand
                                     would have inquired further into whether Davreyn was going to pay its
                                     Federal tax for FYE February 15, 2001. Cf. Starnes v. Commissioner, 680
                                     F.3d at 433–437.




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                                     (317)                     SWORDS TRUST v. COMMISSIONER                                        351


                                     separately to decide whether petitioner trusts are liable as
                                     transferees under Virginia law.
                                           C. Actual Fraud: Va. Code Ann. Sec. 55–80 (2012)
                                      We begin our evaluation with Va. Code Ann. sec. 55–80,
                                     which provides:
                                             Every gift, conveyance, assignment or transfer of, or charge upon, any
                                           estate, real or personal, every suit commenced or decree, judgment or
                                           execution suffered or obtained and every bond or other writing given
                                           with intent to delay, hinder or defraud creditors, purchasers or other
                                           persons of or from what they are or may be lawfully entitled to shall,
                                           as to such creditors, purchasers or other persons, their representatives
                                           or assigns, be void. This section shall not affect the title of a purchaser
                                           for valuable consideration, unless it appear that he had notice of the
                                           fraudulent intent of his immediate grantor or of the fraud rendering void
                                           the title of such grantor.

                                     The person seeking to set aside a conveyance as a fraudulent
                                     conveyance under this section must prove that (1) ‘‘the
                                     transfer was made with the intent to delay, hinder or
                                     defraud creditors’’ and (2) ‘‘the transferee had notice of the
                                     transferor’s intent to defraud.’’ Coleman v. Cmty. Trust Bank,
                                     N.A. (In re Coleman), 299 B.R. 780, 795 (W.D. Va. 2003),
                                     aff ’d in part, rev’d in part and remanded on other issues, 426
                                     F.3d 719 (4th Cir. 2005). A transferee’s fraudulent intent
                                     must be proved with clear and convincing evidence. See Arm-
                                     strong v. United States, 7 F. Supp. 2d 758, 764 (W.D. Va.
                                     1998).
                                        Because it is difficult to prove fraudulent intent by direct
                                     evidence, fraud may be established by circumstantial evi-
                                     dence, which includes various ‘‘badges of fraud’’. See id.
                                     These badges include: ‘‘(1) the close relationship of the par-
                                     ties, (2) the grantor’s insolvency, (3) pursuit of the grantor by
                                     creditors at the time of the transfer, (4) inadequate consider-
                                     ation, * * * (5) retention of possession of the property by the
                                     grantor’’, id., and (6) ‘‘fraudulent incurrence of indebtedness
                                     after the conveyance’’, In re Porter, 37 B.R. 56, 63 (Bankr.
                                     E.D. Va. 1984).
                                        Respondent contends that Davreyn transferred to peti-
                                     tioner trusts its assets and cash in liquidation and petitioner
                                     trusts are substantively liable for Davreyn’s unpaid tax
                                     because the transfer was fraudulent under Virginia law.
                                     Petitioners contend that respondent erroneously collapsed a




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                                     352                  142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     series of transactions into a single transfer. Petitioners fur-
                                     ther contend that because there was no fraudulent transfer
                                     from Davreyn to petitioner trusts, petitioner trusts cannot be
                                     liable as transferees of Davreyn under Virginia law. We
                                     agree with petitioners.
                                        With the exception of Davreyn’s ownership interest in
                                     Davreyn LLC, which was transferred to petitioner trusts
                                     through a redemption transaction which was not fraudulent,
                                     Davreyn did not transfer anything to petitioner trusts. The
                                     sales of Davreyn stock occurred between petitioner trusts
                                     and Alrey Trust. Accordingly, the relevant inquiry must focus
                                     on the value of the consideration petitioner trusts exchanged
                                     with Alrey Trust.
                                        Alrey Trust paid petitioner trusts a total of $13,102,055 in
                                     exchange for their Davreyn stock. Alrey Trust did not use
                                     Davreyn’s cash or its assets to purchase the stock from peti-
                                     tioner trusts; instead, it borrowed the funds from a third-
                                     party lender, Integrated Holdings. Davreyn was solvent at
                                     the time of the stock sale transactions between petitioner
                                     trusts and Alrey Trust. At that time Davreyn’s only out-
                                     standing tax liability related to the redemption transaction
                                     and Davreyn had sufficient assets to pay its tax liability. We
                                     decline to find that any transfer meeting the requirements of
                                     Va. Code Ann. sec. 55–80 occurred between petitioner trusts
                                     and Davreyn or Alrey Trust.
                                           D. Constructive Fraud
                                           We turn to Va. Code Ann. sec. 55–81, which provides:
                                             Every gift, conveyance, assignment, transfer or charge which is not
                                           upon consideration deemed valuable in law, or which is upon consider-
                                           ation of marriage, by an insolvent transferor, or by a transferor who is
                                           thereby rendered insolvent, shall be void as to creditors whose debts
                                           shall have been contracted at the time it was made, but shall not, on
                                           that account merely, be void as to creditors whose debts shall have been
                                           contracted or as to purchasers who shall have purchased after it was
                                           made. Even though it is decreed to be void as to a prior creditor, because
                                           voluntary or upon consideration of marriage, it shall not, for that cause,
                                           be decreed to be void as to subsequent creditors or purchasers.

                                     The person seeking to set aside a transfer under this section
                                     must show that: (1) a transfer occurred, (2) the transfer was
                                     not supported by valuable consideration, and (3) ‘‘ ‘the
                                     transfer was done when the transferor was insolvent or the




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                                     (317)                     SWORDS TRUST v. COMMISSIONER                                        353


                                     transfer rendered the transferor insolvent.’ ’’ Smith v. Porter
                                     (In re Carr & Porter, LLC), 416 B.R. 239, 260 (Bankr. E.D.
                                     Va. 2009) (quoting Wu v. Tseng, Nos. 2:06cv346, 2:06cv580,
                                     at *6 (E.D. Va. Jan. 24, 2007)). ‘‘[T]here must be a showing
                                     of indebtedness existing at the time of the transaction.’’ Id.
                                     (citing C.F. Trust v. Peterson, No. 1:97–CV–2003, 1999 WL
                                     33456231, at *10 (E.D. Va. Jan. 8, 1999)); see also In re
                                     Porter, 37 B.R. at 65.
                                        The only asset Davreyn conveyed directly to petitioner
                                     trusts was its ownership interest in Davreyn LLC, which
                                     held the Goldman Sachs fund shares. However, this convey-
                                     ance occurred before the stock sale transaction and did not
                                     render Davreyn insolvent.
                                        At the time petitioner trusts sold their Davreyn stock to
                                     Alrey Trust, Davreyn was solvent, possessing assets in excess
                                     of $14 million, and owed a tax liability of $37,500 (the tax
                                     liability that arose in connection with the redemption trans-
                                     action). Alrey Trust paid a total of $13,102,055 to petitioner
                                     trusts in exchange for Davreyn’s stock. In calculating the
                                     amount owed to petitioner trusts, the parties to the stock
                                     sale left sufficient cash in Davreyn to pay the $37,500 tax
                                     liability from the redemption transaction. We find no
                                     constructive fraud on this record. 37
                                           E. Virginia’s Trust Fund Doctrine
                                       We now turn to respondent’s contention that petitioner
                                     trusts are liable under Virginia’s trust fund doctrine. In Mar-
                                     shall v. Fredericksburg Lumber Co., 173 S.E. 553, 557 (Va.
                                     1934), the Supreme Court of Appeals of Virginia stated:
                                           But where there are existing creditors of a corporation the stockholders
                                           will not be permitted, as against those creditors, to withdraw the assets
                                           of the corporation without consideration, whether it be done through a
                                           purchase of stock by the corporation or otherwise. We repeat that a
                                           stockholder is not entitled to a share of the capital assets of a corpora-
                                           tion until the debts have been paid. * * *

                                       37 The series of transactions designed to illegitimately avoid tax occurred

                                     immediately after petitioner trusts sold their Davreyn stock to Alrey Trust.
                                     Those transactions were planned and orchestrated by Alrey Trust and
                                     Alrey Acquisition (and not petitioner trusts), and petitioner trusts had nei-
                                     ther actual nor constructive knowledge of those transactions or their pur-
                                     pose.




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                                     354                 142 UNITED STATES TAX COURT REPORTS                                    (317)


                                     In Marshall, 173 S.E. at 557–558, the corporation received no
                                     consideration for its assets. The court emphasized that the
                                     transaction at issue was negotiated by the corporation’s
                                     president, who was obligated ‘‘to conserve the assets of the
                                     corporation and have them forthcoming for the purpose, pri-
                                     marily, of paying corporation debts.’’ Id. at 558. In Ashworth
                                     v. Hagan Estates, Inc., 181 S.E. 381, 385 (Va. 1935), the
                                     Supreme Court of Appeals of Virginia quoted with approval
                                     a Supreme Court of Oregon case stating that the concepts of
                                     the trust fund doctrine apply ‘‘where a corporation transfers
                                     all its assets to another corporation with a view of going out
                                     of business, and nothing is left with which to pay its debts’’.
                                        Mr. Griffin and Ms. Swords, Ms. Brotherton, and Ms.
                                     Mackell did not take any actions constituting a winding up
                                     or dissolution of Davreyn while serving as the officers and
                                     directors of Davreyn. See Starnes v. Commissioner, T.C.
                                     Memo. 2011–63, slip op. at 31–32 (applying North Carolina’s
                                     trust fund doctrine in a transferee liability case). When peti-
                                     tioner trusts sold their Davreyn stock, neither petitioner
                                     trusts nor their representatives knew that Alrey Trust
                                     planned to dissolve Davreyn. When Alrey Trust dissolved
                                     Davreyn, Mr. Austin was serving as Davreyn’s sole director,
                                     and no one associated with petitioner trusts had any role in
                                     structuring the sale of the Alcoa stock or in deciding to dis-
                                     solve Davreyn. Petitioner trusts had no interest in Davreyn
                                     when Alrey Trust dissolved it because they had already sold
                                     all of their Davreyn stock.
                                        Davreyn was not insolvent when petitioner trusts sold
                                     their Davreyn stock. Neither petitioner trusts nor Davreyn’s
                                     directors attempted to avoid any existing debt of Davreyn.
                                     We decline to find on this record that petitioner trusts or
                                     Davreyn’s directors took any actions before or at the time of
                                     the Davreyn stock sale that would support the application of
                                     Virginia’s trust fund doctrine.
                                     VII. Conclusion
                                       Respondent has failed to establish that an independent
                                     basis exists under applicable State law or State equity prin-
                                     ciples for holding petitioner trusts liable for Davreyn’s
                                     unpaid tax. Accordingly, we hold that section 6901 does not
                                     apply to these cases. We have considered the parties’




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                                     (317)                    SWORDS TRUST v. COMMISSIONER                                        355


                                     remaining arguments, and to the extent not discussed above,
                                     conclude those arguments are irrelevant, moot, or without
                                     merit.
                                       To reflect the foregoing,
                                                                          Decisions will be entered for petitioners.

                                                                               f




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