Billy F. Hawk, Jr., GST Non-Exempt Marital Trust, Trustee, Transferee, Nancy Sue Hawk and Regions Bank, Co-Trustees; Estate of Billy F. Hawk, Junior, Trustee, Transferee, Nancy Sue Hawk and Regions Bank, Co-Executors; Billy F. Hawk, Jr., GST Exempt Marital Trust, Trustee, Transferee, Nancy Sue Hawk and Regions Bank, Co-Trustees; Nancy Sue Hawk, Transferee, Petitioners-Appellants,
Commissioner of Internal Revenue, Respondent-Appellee.
Argued: April 30, 2019
from the United States Tax Court; Nos. 30024-09; 30025-09;
30026-09; 30515-09-Joseph R. Goeke, Judge.
Eric Butler, LEWIS, THOMASON, KING, KRIEG & WALDROP,
P.C., Knoxville, Tennessee, for Appellants.
T. Catterall, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee.
Eric Butler, Katherine Sanford Goodner, LEWIS, THOMASON,
KING, KRIEG & WALDROP, P.C., Knoxville, Tennessee, Ashley
Hodges Morgan, LEWIS, THOMASON, KING, KRIEG & WALDROP,
P.C., Memphis, Tennessee, David S. Garbett, Brian P. Yates,
GARBETT, ALLEN & ROZA, P.A., Miami, Florida, John P.
Konvalinka, GRANT, KONVALINKA & HARRISON, P.C.,
Chattanooga, Tennessee, for Appellants.
T. Catterall, Gilbert S. Rothenberg, Richard Caldarone,
UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
Before: GUY, SUTTON, and NALBANDIAN, Circuit Judges.
SUTTON, Circuit Judge.
Billy Hawk died in 2000, his wife Nancy Sue decided to sell
the family bowling business, Holiday Bowl. With the help of
lawyers and accountants, she made a deal with MidCoast, a
company that claimed an interest in acquiring companies with
corporate tax liabilities that it could set off against its
net-operating losses. Holiday Bowl first sold its
assets-bowling alleys-to Bowl New England, receiving $4.2
million in cash and generating about $1 million in federal
taxes. After that, Nancy Sue and Billy's estate sold
Holiday Bowl to MidCoast for about $3.4 million, in essence
exchanging one pile of cash for another minus the tax debt
MidCoast agreed to pay. But MidCoast never paid the taxes.
The United States filed this transferee-liability action
against Nancy Sue Hawk and Billy Hawk's estate to recover
Holiday Bowl's unpaid taxes. The Tax Court ruled for the
government, concluding that the Hawks were transferees of a
delinquent taxpayer under federal law and permitting the
government to recover the unpaid taxes from the Hawks under
Tennessee law. We affirm.
shareholders sell a privately held corporation, they have a
range of options. One is an asset sale, in which the
corporation sells its assets (e.g., the bowling alleys), pays
a tax on the gain, and distributes what's left to the
shareholders. In this setting, the Commissioner taxes the
corporation upon the sale of the assets and taxes the
shareholders when they receive their distributions.
option is a stock sale, in which the shareholders sell their
stock to a third party. Because the corporation never sells
its assets, the transaction doesn't trigger corporate
tax, and the original shareholders pay only their individual
income taxes. If the new owners dispose of the corporate
assets down the road, however, the corporation will incur
taxes then. Buyers in a stock sale often pay less to account
for future taxes they must pay.
Billy Hawk's death in 2000, Nancy Sue owned almost a
fifth of the company's stock and her husband's estate
owned the remainder. Billy and Nancy Sue's two sons
operated the two bowling alleys awhile. But that didn't
work. By 2002, she realized she needed to sell Holiday Bowl.
She chose an asset sale to Bowl New England. The sale left
Holiday Bowl with $4.2 million in cash and left the company
owing about $1 million in federal income taxes and about
$200, 000 in state taxes. Holiday Bowl also owned some real
property, a family horse farm that Nancy Sue wanted to keep,
valued at $777, 000.
to lower the corporate taxes triggered by the transaction,
the Hawks' broker approached their attorney with
information about a company called MidCoast that had
"tremendous tax-loss carry-forwards." J.A. 3 at
797. If MidCoast bought Holiday Bowl, the broker advertised,
Holiday Bowl would not need to pay corporate taxes on the
asset sale. As a result, MidCoast promised to pay the Hawks
more than Holiday Bowl's actual value-what would have
been its cash on hand minus outstanding taxes. Nancy Sue Hawk
and the estate stood to keep an extra $200, 000 to $300, 000
by structuring the transaction in this way. MidCoast
purported to offer Holiday Bowl a way to realize the best
attributes of an asset sale (the higher sale price of the
assets) and a stock sale (no corporate-level tax). In closing
his recommendation, the broker, warily but not warily enough,
said: "[I]f it seems too good to be true, it probably
is. But maybe this is the exception." Id. at
Hawks proceeded to enjoy what looked like a free lunch. Under
the purchase agreement, the Hawks sold Holiday Bowl some of
their shares in exchange for the company's remaining
property, the horse farm. That left Holiday Bowl with nothing
but cash. MidCoast paid $3.4 million plus expenses for
Holiday Bowl's $4.2 million. To finance the transaction,
MidCoast claimed it would borrow money from a company called
Sequoia Capital. According to MidCoast, Holiday Bowl would
then enter the debt-collection business, rapidly generating
new losses that would offset Holiday Bowl's existing
the sale, MidCoast transferred Holiday Bowl to Sequoia in
exchange for the cancellation of Sequoia's loan and about
$320, 000 in cash. No one ever paid Holiday Bowl's
outstanding taxes, and the one-time bowling company dissolved
Internal Revenue Service investigated MidCoast, uncovering
the Holiday Bowl sale and about sixty similar transactions.
That did not end well for MidCoast, Sequoia, and a law firm,
as a grand jury indicted several individuals associated with
each of them. One defendant pleaded guilty. Others fled the
country. The government launched a civil collection
proceeding against the Hawks in pursuit of Holiday Bowl's
unpaid taxes. The Tax Court concluded that Sequoia's loan
to MidCoast was a sham and that Holiday Bowl had ...