(CN) - The 9th Circuit revived proceedings into an unpaid $81 million tax liability tied to the sale of assets once owned by a major shareholder of Wyeth's predecessor.
Richard Diebold was the major American Home Products shareholder in question, according to the ruling published Monday. He formed Double-D Ranch Inc. in 1980 as a personal holding company for AHP shares and other investment assets.
After Richard's death in 1996, his nonagenarian widow Dorothy and two co-trustees of a marital trust named for her opted to sell Double-D shares so that she could make cash gifts to her three children.
The ruling notes that Double-D's assets were valued at approximately $319 million in 1999 when Dorothy was "anxious" to sell.
A simple sale "of Double-D's assets would have triggered tax liability of approximately $81 million," the ruling states.
It has since been found that Double-D shareholders concocted a "fraudulent tax avoidance scheme" to minimize such liabilities, according to the ruling.
Sentinel Advisors LLC helped Double-D organize a sale to a placeholder, special-purpose entity that eventually became Shap Acquisition Corporation II, according to the ruling.
"Shap ultimately paid the Double-D shareholders approximately $309 million and received about $319 million from its sale of Double-D's assets," the ruling states. "Because Shap claimed losses sufficient to off-set the built-gain tax liability, it did not pay any tax on its sale of Double-D's assets. After repayment of its Rabobank loan, Shap retained profits of about $10 million."
The court found that "the $309 million paid to the Double-D shareholders was distributed proportionally to the marital trust and the Diebold Foundation," a charity that Richard founded in 1963.
A 2001 dissolution plan then resulted in distribution of all Diebold Foundation assets in equal shares to the three foundations formed by the Diebold children: the Salus Mundi Foundation, the Ceres Foundation, and the Diebold Foundation.
"These transfers, of approximately $33 million each, were not made in exchange for any property or in satisfaction of any existing debt," the court found.
In 2006, the Internal Revenue Service assessed a deficiency of $81 million, plus penalties and interest, against Double-D for the 1999 tax year.
Collecting from Double-D proved futile, however, so the IRS set its sights on the Double-D shareholders in 2007.
When 102-year-old widow Dorothy bested the government on this front in 2007, "the IRS issued notices of transferee liability against each of the Diebold children's foundations for the $33 million that each foundation received from the original Diebold Foundation," according to the ruling.
The U.S. Tax Court cleared these heirs as well, however, finding that "the original Diebold Foundation was not liable as a transferee of Double-D because the Double-D shareholders lacked actual or constructive knowledge under New York state law of Shap's fraudulent tax avoidance scheme," according to the ruling.
With the Diebold Foundation not liable as a transferee of Double-D, the court found that the successor foundations could not be liable as transferees of a transferee.
It was the appeal by the IRS as to the Tax Court's decision in favor of Salus Mundi that triggered a reversal Monday in the 9th Circuit.
"Because the Diebold Children's foundations were organized in Arizona, Connecticut, and South Carolina, the Tax Court's decisions in their favor were appealable to the Ninth, Second, and Fourth Circuits, respectively," Judge John Noonan wrote for a three-person panel. "The IRS did not appeal the decision in favor of the Ceres Foundation to the Fourth Circuit. But the IRS did appeal the decision in favor of the success Diebold Foundation to the Second Circuit."
The 2nd Circuit concluded that the Double-D shareholders had constructive knowledge under New York law of the tax-avoidance scheme and were therefore liable under state law.
This decision thus requires the 9th Circuit to find "that the shareholders had constructive knowledge of the tax avoidance scheme and made a fraudulent conveyance," Noonan wrote for the San Francisco panel.
On remand, the Tax Court must "determine: (1) Salus Mundi's status as a transferee of a transferee under the federal law inquiry of section 6901; and (2) whether the IRS assessed liability within the applicable limitations period."
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