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The Tax Court rejects the IRS’s section 6901 analysis

By Todd Welty and Kristina Novak

On 29 May 2014, the Tax Court, in a division opinion, decided another transferee liability case in favour of the taxpayers. See Swords Trust v Commissioner, 142 TC No. 19 (2014). In Swords, the taxpayers (which were four separate trusts) together owned all the outstanding shares of stock in a C corporation, Davreyn. Davreyn was a personal holding company that owned a substantial amount of stock in Reynolds Metal (which produced the popular aluminium foil brand Reynolds Wrap). Prior to the transaction at issue, Reynolds Metal merged with Alcoa, another aluminium company, and Davreyn’s existing Reynolds Metal stock was converted into shares of Alcoa stock.

Sometime in 2000, the taxpayers’ accountant learned about an opportunity for shareholders of a personal holding company to sell their appreciated stock to a financial buyer in a tax-efficient manner. The taxpayers eventually agreed to enter into such proposed stock sale and on 15 February 2001 the taxpayers executed a stock purchase agreement wherein the taxpayers sold all of their stock in Davreyn to Alrey Trust (an entity that was affiliated with the investment banking firm Integrated Capital Associates, or ICA). Unbeknown to the taxpayers, Alrey Trust immediately liquidated Davreyn and then sold the Alcoa stock. On its tax return, Alrey Trust reported a substantial gain on the subsequent sale of the Alcoa stock and offset such gain with an artificial loss that was generated from a son-of-boss transaction…

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