Upon Frank Sawyer's death, a marital deduction trust was established for the benefit of his widow, Mildred Sawyer. The Trust owned stock in several closely-held corporations. After Mildred died, the corporations owed the federal government more than $24 million in taxes and penalties. Before the taxes were due, however, the Trust sold the corporations and the new shareholders stripped the companies of their assets. The Internal Revenue Service (IRS) then sought to collect the corporations’ tax from the Trust. However, the Tax Court concluded that the Trust was not liable because the IRS failed to prove that the Trust had knowledge of the asset-stripping scheme and did not show that any of the corporation's assets were transferred directly to the Trust.
On appeal, the U.S. Court of Appeals reversed the Tax Court.
The U.S. Court of Appeals found that the Tax Court correctly applied state law to determine whether the Trust was liable for the corporations’ taxes and penalties. However, the Tax Court was incorrect in construing that for the Trust to be liable Massachusetts’ state law required either 1) that the Trust knew of the new shareholders' asset stripping scheme or 2) that the corporations transferred assets directly to the Trust.
The IRS presented evidence that the four corporations made fraudulent transfers to various acquisition vehicles and the acquisition vehicles purchased the four companies from the Trust. If the IRS can then present evidence that at the time of the purchases the assets of these acquisition vehicles were unreasonably small in light of their liabilities and that the acquisition vehicles did not receive reasonably equivalent value in exchange for the purchase prices, then the Trust can be held liable for the corporations’ taxes and penalties regardless of whether it had any knowledge of the new shareholders' asset-stripping scheme.
The decision of the Tax Court was reversed, and the case was remanded to the Tax Court to determine whether the conditions for liability were met in this case. Frank Sawyer Trust Of May 1992 V. Commissioner Of Internal Revenue.
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