Julia R. Swords Trust, Transferee, Margaret R. Mackell, Dorothy R. Brotherton, and Julia R. Swords, Co-Trustees v. Commissioner

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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 328 142 UNITED STATES TAX COURT REPORTS (317)

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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