T.C. Memo. 2020-8



                           UNITED STATES TAX COURT



  ALTA V LIMITED PARTNERSHIP, TRANSFEREE, ET AL.,1 Petitioners v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



      Docket Nos. 26828-08, 26829-08,            Filed January 13, 2020.
                 26865-08, 26867-08.



      Vincent J. Beres, Amy L. Barnes, Michael G. Goller, and Sara Stellpflug

Rapkin, for petitioners.

      Steven N. Balahtsis, Gail Campbell, Lyle B. Press, and Robert E. Dallman,

for respondent.




      1
       Cases of the following petitioners are consolidated herewith: Allsop
Venture Partners III, Limited Partnership, docket No. 26829-08; Alta
Subordinated Debt Partners III, L.P., docket No. 26865-08, and State of Wisconsin
Investment Board, docket No. 26867-08.
                                         -2-

[*2]         MEMORANDUM FINDINGS OF FACT AND OPINION


       COHEN, Judge: Pursuant to three separate notices dated August 21, 2008,

sent to Alta V, LP (Alta V), Allsop Venture Partners III, LP (Allsop), and Alta

Subordinated Debt Partners III, LP (Alta Sub), and one notice dated September 5,

2008, sent to the State of Wisconsin Investment Board (SWIB, and collectively

with Alta V, Allsop, and Alta Sub, petitioners), respondent determined that

petitioners are liable as transferees for the Federal income tax liability, additions to

tax, penalty, and interest of Shockley Communications Corp. (SCC) for its short

tax year ending May 31, 2001. On the basis of respondent’s determination as to

the value of the assets transferred to petitioners, respondent determined that the

amount of transferee liability of each petitioner relating to SCC’s outstanding

liability plus a penalty, additions to tax, and interest as provided by law are as

follows: (1) $7,165,820.78 for Alta V; (2) $25,160,577.15 for Allsop;

(3) $4,261,532.97 for Alta Sub; and (4) $28,267,882.78 for SWIB. These cases

were consolidated for briefing and opinion.

       These cases relate to three separate notices of deficiency concerning SCC’s

short tax year which ended on May 31, 2001. One notice was sent to the

corporation’s last known address in Washington, D.C. (Washington notice), and a
                                          -3-

[*3] second joint notice was sent to Terry K. Shockley (T. Shockley) and Sandra

K. Shockley (S. Shockley), the former corporate executives, at their home address

in Madison, Wisconsin (Madison notice). The third notice was sent to Northern

Communications Acquisition Corp. (NCAC), which had purchased SCC, at the

NCAC’s last know address in Arlington, Virginia (NCAC notice). A petition was

filed in this Court only in response to the Madison notice, which was ultimately

dismissed for lack of jurisdiction on April 26, 2007. SCC took no action in

response to the Washington notice, and NCAC also took no action in response to

the NCAC notice. The Internal Revenue Service (IRS) assessed against SCC its

unpaid Federal income tax, penalty, and additions to tax. After the IRS made its

assessment against SCC, it sent Transferee Notice of Liability Statements (notices

of transferee liability) to the Shockleys on August 21, 2008, prompting them to

file a second petition with this Court.

      We found in Shockley v. Commissioner (Shockley I), T.C. Memo. 2011-96,

that the Madison notice was invalid. We decided that the petition filed in response

to the Madison notice neither prohibited assessment for the purposes of section

6503(a)(1) nor extended the period of limitations under section 6501(a) and (c),

rendering the notices of transferee liability untimely. Respondent appealed and

the Court of Appeals for the Eleventh Circuit reversed, holding that the Madison
                                         -4-

[*4] notice was valid and that the petition filed in response to that notice

suspended the period of limitations under 6501(a). Shockley v. Commissioner

(Shockley II), 

(11th Cir. 2012).

      On remand we found that if the Madison notice was valid, the notices of

transferee liability were timely and the Shockleys were liable as transferees for

SCC’s unpaid Federal tax. Shockley v. Commissioner (Shockley III), T.C. Memo.

2015-113. On motion for reconsideration we supplemented our opinion in

Shockley III and found that the Shockleys were liable for prenotice interest as well

as postnotice interest calculated from the notice date and the dates they actually

received distributions from SCC. Shockley v. Commissioner (Shockley IV), T.C.

Memo. 2016-8. The Shockleys appealed, and the Court of Appeals for the

Eleventh Circuit affirmed our decision in Shockley III as supplemented by

Shockley IV. Shockley v. Commissioner (Shockley V), 

(11th Cir.

2017).

      The issues for decision are: (1) whether expiration of the period of

limitations under section 6901(c) precludes respondent from assessing transferee

liability against petitioners for SCC’s tax year ending May 31, 2001; (2) if it is

determined that the notices were timely, whether petitioners are liable as

transferees for their respective portions of the unpaid determined and assessed
                                         -5-

[*5] deficiency, additions to tax, penalty, and interest with respect to SCC’s

corporate income tax for 2001; (3) whether petitioners’ liabilities are limited to the

extent petitioners are good faith transferees who provided value to SCC; and

(4) whether respondent met the burden of proving that petitioners are liable as

transferees for the penalty assessed against SCC. Unless otherwise indicated, all

section references are to the Internal Revenue Code in effect at all relevant times,

and all Rule references are to the Tax Court Rules of Practice and Procedure.

                               FINDINGS OF FACT

      The parties have agreed that these cases may be decided on the stipulations

and evidentiary record submitted in Sandra K. Shockley, Transferee, et al. v.

Commissioner, docket Nos. 28207-08, 28208-08, and 28210-08, and their joint

stipulation of facts. The facts with respect to these cases that were found in

Shockley I, Shockley III, and Shockley IV, together with the stipulated facts, are

incorporated in our findings by this reference. We summarize for convenience

relevant facts from Shockley I, Shockley III, and Shockley IV and set forth

additional findings for purposes of deciding the issues raised in these cases. When

the petitions were filed, Alta V and Alta Sub had principal places of business in

Boston, Massachusetts; Allsop had its principal place of business in Cedar Rapids,

Iowa; and SWIB had its principal place of business in Madison.
                                         -6-

[*6] SCC

         After purchasing a radio station in Madison in early 1985, the Shockleys

incorporated SCC, a closely held corporation, under the laws of Wisconsin.

Between 1985 and 2000 SCC grew to own five television stations, a radio station,

and a video production company in Wisconsin, as well as a television station and

several radio stations in Minnesota. In 1995 SCC brought in additional investors

to fund its significant business expansion. SCC ownership grew to include 29

separate shareholders, including: the Shockleys, Shockley Holdings, L.P.

(Shockley Holdings), which was an entity owned by the Shockleys and their adult

children, several other individuals, and a number of investment funds including

petitioners (collectively, SCC shareholders). As of May 31, 2001, petitioners and

the Shockleys owned the following percentages of outstanding SCC common

stock:

                    SWIB                          24.57%
                    Allsop                        21.87
                    T. Shockley                10.18879
                    S. Shockley                10.18879
                    Alta V                         6.23
                    Alta Sub                        3.7
                    Shockley Holdings           3.52508
                                       -7-

[*7] At all material times petitioners were represented on the SCC board of

directors (SCC board). An SWIB employee, Jonathan Vanderploeg, served as an

adviser on the SCC board. (Because SWIB was an agency of the State of

Wisconsin, its employees could not serve as board members.) Brian McNeill

represented both Alta V and Alta Sub and Paul Rhines represented Allsop as

members of the SCC board. The Shockleys served both as SCC board members

and as SCC executive officers. In their roles as SCC executive officers T.

Shockley served as president and treasurer, and S. Shockley served as vice

president and secretary.

SCC Shareholder Agreement of November 1995

      On November 1, 1995, SCC shareholders entered into a shareholders’

agreement (SCC shareholders’ agreement). This agreement closed on the same

date. The agreement defined SCC shareholders as follows: (1) management

investors, which included the Shockleys; (2) nonmanagement investors, which

included Allsop; (3) new investors, which included SWIB, Alta V, and Alta Sub;

and (4) Burr Egan investors, which comprised Alta V, Alta Sub, and Customs

House Partners (an entity not a party to these cases). The SCC shareholders’

agreement granted petitioners a right of redemption, or “put option”, that upon

exercise required SCC to repurchase their shares as follows:
                                      -8-

[*8] ARTICLE VIII      PUT RIGHTS.

           Section 8.1. New Investor’s Right to Put New Investor
    Shares to the Company. The Company hereby irrevocably grants to
    the New Investors the right (the “Put Option”) to require the
    Company to purchase all but not less than all (except as provided
    herein) of the Shares then held by any New Investor exercising its
    rights, or participating in such exercise, pursuant to this Article VIII
    (with respect to such exercise, the “New Investor Shares”) and, to the
    extent provided below, to purchase all but not less than all (except as
    provided herein) of the shares of Common Stock held by any
    Non-Management Investor (with respect to such exercise, the
    “Non-Management Investor Shares”) as set forth below and, if
    required, with the prior consent of the FCC:

           (a) At any time after the date which is six and one-half years
    after the Closing Date, SWIB and/or a Burr Egan Investor may
    exercise the Put Option by delivering a written notice to the Company
    (with a copy to the other New Investors and the Non-Management
    Investors) and the Company (i) shall use its best efforts to incur
    additional debt, to the extent necessary, to a maximum principal
    amount for all existing debt plus such additional debt of up to 4.0
    times operating cash flow for the immediately preceding twelve
    calendar month period then ended and to utilize available cash to
    purchase the Shares held by such exercising New Investor and any
    other New Investor or Non-Management Investor who elects to
    participate pursuant to the provisions of the next sentence, and
    (ii) shall use commercially reasonable efforts to close such purchase
    on or prior to the seventh anniversary of the Closing Date. In the
    event SWIB or a Burr Egan Investor exercises the Put Option
    pursuant to the terms of this subsection (a), each other New Investor
    and each Non-Management Investor shall have the right to participate
    by providing written notice to the exercising New Investor and the
    Company within ten (10) business days of the delivery of the notice
    provided for in the preceding sentence. The consideration to be paid
    to such New Investors and Non-Management Investors upon exercise
    of the Put Option shall be cash in an amount equal to the sum of
                                       -9-

[*9] (i) the New Investor Portion or the Non-Management Investor Portion
     (as the case may be) of the Fair Market Value, calculated in
     accordance with Section 8.2 hereof, as of a date which is as close to
     the closing of the exercise of the Put Option as is reasonably
     practicable, which date shall in no event be earlier than the date on
     which notice of the exercise of the Put Option is delivered to the
     Company, plus (ii) interest on such amount from the date of
     calculation of the Fair Market Value to and including the date of
     payment at a rate equal to 15% per annum. In the event that the
     Company has the ability to purchase some but not all of the Shares
     held by such New Investors and Non-Management Investors, the
     participation by each such New Investor and Non-Management
     Investor shall be on a pro-rata basis in accordance with the number of
     Shares which such New Investor or Non-Management Investor then
     holds; provided, however, that in the event any such New Investor or
     Non-Management Investor is not able to sell all of his, her or its
     Shares then held as result of this sentence, such New Investor or
     Non-Management Investor may withdraw from participating in such
     put exercise and the participation by the remaining New Investors and
     Non-Management Investors shall be adjusted accordingly. [Emphasis
     added.]

             (b) At any time after the date which is seven years after the
      Closing Date (whether or not any action has been taken or is currently
      being taken under Section 8.1(a) hereof), SWIB and/or a Burr Egan
      Investor may exercise the Put Option under this Section 8.1(b) by
      delivering a written notice to the Company (with a copy to the other
      New Investors and the Non-Management Investors) and the Company
      shall use its best efforts to take any and all actions necessary or
      appropriate to purchase the Shares held by such exercising New
      Investor and any other New Investor or Non-Management Investor
      who elects to participate pursuant to the provisions of the next
      sentence, including without limitation incurring additional debt and
      utilizing available cash as set forth in Section 8.1(a), and to close
      such purchase on or prior to the date which is seven and one-half
      years after the Closing Date. In the event SWIB or a Burr Egan
      Investor exercises the Put Option pursuant to the terms of this
                                       - 10 -

[*10] subsection (b), each other New Investor and each Non-Management
      Investor shall have the right to participate by providing written notice
      to the exercising New Investor and the Company within ten (10)
      business days of the delivery of the notice provided for in the
      preceding sentence. The consideration to be paid to such New
      Investors and Non-Management Investors upon exercise of the Put
      Option shall be cash in an amount equal to the sum of (i) the New
      Investor Portion or the Non-Management Investor Portion (as the
      case may be) of the Fair Market Value, calculated in accordance with
      Section 8.2 hereof, as of a date which is as close to the closing of the
      exercise of the Put Option as is reasonably practicable, which date
      shall in no event be earlier than the date on which notice of the
      exercise of the Put Option is delivered to the Company, plus
      (ii) interest on such amount from the date of calculation of the Fair
      Market Value to and including the date of payment at a rate equal to
      15% per annum. * * * [Emphasis added.]

             Section 8.2. Determination of Fair Market Value of New
      Investor Shares. The New Investor Portion or the Non-Management
      Investor Portion (as the case be) of the Fair Market Value for any
      New Investor exercising the Put Option, or any New Investor or
      Non-Management Investor electing to participate as provided in
      Section 8.1 above, shall equal (i) the fair market value (as defined
      below) of the Company, multiplied by (ii) a fraction, the numerator of
      which is the number of Shares held by the New Investor so exercising
      or the New Investor or Non-Management Investor (as the case may
      be) participating and the denominator of which is the number of
      shares of Common Stock of the Company then outstanding, on a fully
      diluted basis. The fair market value (the “Fair Market Value”) of the
      Company shall be determined following the exercise of the Put
      Option as of the valuation dates specified in Section 8.1 in
      accordance with the following provisions:

             (a) The Company and the New Investors so exercising or
      participating agree to negotiate in good faith in an effort to reach
      agreement upon such Fair Market Value for a period of thirty (30)
      days following exercise of the Put Option. If within such thirty (30)
                                      - 11 -

[*11] day period, the Company and such New Investors agree upon such
      Fair Market Value, the Fair Market Value shall be as so agreed;

             (b) If the Company and the New Investors holding a majority
      of the outstanding shares of Common Stock held by the New
      Investors so exercising or participating are unable to reach agreement
      on the Fair Market Value, the Fair Market Value shall be determined
      at the Company’s expense by one or more independent investment
      banking firms of national standing acceptable to the Company and
      such majority in interest of such New Investors and selected as
      hereinafter provided. One investment banking firm mutually
      acceptable to such majority in interest of such New Investors and the
      Company shall be selected. If the Company and such majority in
      interest of such New Investors are able to agree on a mutually
      acceptable investment banking firm, such firm shall determine the
      Fair Market Value as provided in clause (c) below. In the event such
      majority in interest of such New Investors and the Company fail to
      select a mutually acceptable investment banking firm, such majority
      in interest of such New Investors and the Company shall each select
      an investment banking firm. Each of the two appointed firms shall be
      instructed to determine, within no more than ten (10) days, the Fair
      Market Value as provided in clause (c) below. If the determinations
      of the two investment banking firms do not differ by more than 10%
      of the lower thereof, then the average of the two determinations shall
      be conclusively deemed to be the Fair Market Value. If the
      determinations of the two investment banking firms differ by more
      than 10% of the lower thereof, then the two investment banking firms
      shall, on the earliest practicable date, appoint a third investment
      banking firm, or if they cannot agree, such third investment banking
      firm shall be appointed in accordance with the rules of the American
      Arbitration Association * * * and such investment banking firm shall
      make its determination of the Fair Market Value as provided in clause
      (c) below. In which case, the final and conclusive Fair Market Value
      shall then be the average of the two closest valuations among the
      determinations thereof of the three investment banking firms. All
      decisions of the investment banker(s) shall be rendered in writing and
      shall be signed by the investment banker(s). The Fair Market Value
                                       - 12 -

[*12] determined as provided in this Section 8.2, shall be conclusive, final
      and binding * * *

              (c) In determining Fair Market Value of the Company, the
      Company and the New Investors so exercising and the New Investors
      and Non-Management Investors so participating agree that each
      investment banker shall be instructed, among other things: (i) to
      consider recent relevant transactions involving similar companies,
      owning and operating radio and/or television stations in similar
      markets, (ii) to consider the current market for publicly traded
      companies owning similar radio and/or television stations in similar
      market, (iii) to utilize all appropriate valuation models and techniques
      employing a wide range of assumptions, (iv) to consider the value of
      any options to acquire any interest in any company, business or asset
      (whether by acquisition of stock, assets or otherwise) to the extent the
      value of such interest exceeds the exercise price (in cash, securities,
      other assets, assumption of liabilities or otherwise) of such option,
      and further (v) that the Fair Market Value of the New Investor Shares
      and the Non-Management Investor Shares (as the case may be) held
      by the New Investors so exercising or the New Investors or Non-
      Management Investors so participating (as the case may be) shall be
      determined on the basis of the following assumptions: (A) without
      any reduction in value for lack of control or the inherent lack of
      liquidity of non-public minority shares, (B) giving full effect to the
      earnings history and prospects of the Company, (C) that there were
      liquid public markets for the Common Stock capable of absorbing a
      sale of all such New Investor Shares and Non-Management Investor
      Shares with no discount from otherwise prevailing market prices or
      for illiquidity, (D) the proceeds that would be realized would be those
      realized upon the sale of all of the Company’s assets, without
      reduction for any taxes or transaction expenses that might occur as a
      result of the sale or any refinancing, (E) that there is a willing buyer
      with adequate recourse debt financing and a seller with no
      compulsion to sell, and (F) otherwise on a basis which values all
      shares of Common Stock at the same per share price. Each
      investment banker shall be required to render an opinion that the Fair
                                       - 13 -

[*13] Market Value is a price which is reasonably likely to be obtained in a
      current sale of the Company. * * *

      The SCC shareholders’ agreement further provided a “drag-along”

provision that permitted a supermajority of SCC shareholders to compel the

remaining SCC shareholders to sell their shares in the company as follows:

      Section 3.4.   Drag-Along Obligations.

              (a) In the event that 65% of the outstanding shares of
      Common Stock held by the Investors (without regard to any dilution
      as a result of the equity earn back set forth in Section 6 of the Stock
      Purchase Agreement or as a result of the grant or exercise of options
      and awards under the Senior Management Incentive Plan) determine
      to sell or otherwise dispose of all or substantially all of the assets of
      the Company or all of the capital stock of the Company, in the same
      negotiated transaction, to any other unaffiliated party or parties, or to
      cause the Company, in the same negotiated transaction, to merge with
      or into or consolidate with any other unaffiliated party or parties (in
      each case, the “Buyer”) in a bona fide negotiated transaction (a
      “Sale”), each Investor (including any Permitted Transferees) shall be
      obligated to and shall, upon request of such other Investors: (i) sell,
      transfer and deliver, or cause to be sold, transferred and delivered, to
      the Buyer, his, her or its Shares on the same terms (including, without
      limitation, for the same consideration per Share as will be received by
      such other Investors) applicable to such other Investors; and
      (ii) execute and deliver such instruments of conveyance and transfer
      and take such other action, including voting such Shares in favor of
      any Sale proposed by such other Investors and executing any
      purchase agreements, merger agreements, indemnity agreements,
      escrow agreements or related documents, as such other Investors or
      the Buyer may reasonably require in order to carry out the terms and
      provisions of this Section 3.4, subject to the execution of such
      agreements and documents by such other Investors and, if required,
      the prior consent of the FCC; provided, however, that the provisions
                                        - 14 -

[*14] of this Section 3.4 shall be inoperative and of no further force and
      effect with regard to any Sale unless (i) the New Investors consent to
      such Sale or other transaction, which consent shall be given or
      withheld in their sole and absolute discretion, or (ii) the resulting Sale
      provides any non-consenting New Investor with total consideration
      equal to its pro rata share of the aggregate consideration (including
      any payments in connection with noncompetition, consulting or
      similar agreements) to be received by all Investors and any other
      holder of equity interests in the Company, which consideration
      (assuming such sale occurs within 6½ years of the Closing Date) shall
      provide such New Investor with a compounded annual IRR from the
      Closing Date through and including the date of the consummation of
      such Sale equal to or in excess of 25% on such non-consenting New
      Investor’s [sic] initial investment in the Company (as set forth on
      Schedule A to the Stock Purchase Agreement). [Emphasis added.]

Decision To Sell SCC

      In 1999 the Shockleys, approaching retirement age, started to consider their

future as owners of SCC. Around early 2000 they began exploring several

strategic alternatives for SCC, including a stock sale and selling SCC’s assets. On

January 21, 2000, the Shockleys met with Stephen A. Schmidt, a managing

director and tax partner of RSM McGladrey, Inc. (RSM). RSM, an affiliate of

SCC’s accounting firm McGladrey & Pullen, is a professional services firm that

provided SCC and its shareholders with tax and structuring advice. RSM

provided the Shockleys and other SCC board members an analyses prepared by

Schmidt comparing six potential alternative futures for SCC: (1) a sale of assets

by SCC followed by its liquidation, (2) a sale of SCC stock, (3) tax-free
                                       - 15 -

[*15] reorganizations under section 368, (4) a “spin-off” of SCC’s radio station

assets (radio assets) under section 355 followed by a sale of SCC stock,

(5) redemption of SCC stock from the shareholders, and (6) a sale of SCC stock

using an employee ownership plan. The SCC board reviewed the RSM analysis

comparing a stock sale with an asset sale, which projected that a stock sale would

produce a much greater return of net after-tax proceeds to shareholders. For that

reason, the SCC board decided to pursue a stock sale.

      On April 5, 2000, T. Shockley on behalf of SCC entered into an exclusive

brokerage agreement with Kalil & Co., Inc. (Kalil), a media broker. After the

brokerage agreement was in place, Kalil began seeking potential buyers for SCC.

At some point it became apparent that the general preference of buyers in the

broadcasting industry was an asset sale. While Kalil was able to find potential

buyers interested in SCC’s assets, the broker struggled to find a broadcasting

business that would be interested in buying the stock of a company such as SCC

that had both television stations and radio stations. Buyers showing interest in the

small-market radio stations were not interested in the midsized-market television

stations, and vice versa.
                                        - 16 -

[*16] Sale of SCC’s Television Assets

      One potential buyer, Quincy Newspapers, Inc. (QNI), a media company in

Quincy, Illinois, made an offer in May 2000. Structured as an asset sale, the offer

tendered a purchase price of $160 million for SCC’s television stations and

production company (television assets), which made up approximately 95% of

SCC’s total radio and television assets. However, on May 17, 2000, QNI

withdrew its offer citing: (1) disagreement with paying a premium price related to

SCC’s prior capital investments in digital television broadcasting readiness,

(2) disagreement with SCC’s projected revenue streams, and (3) concerns about

securing favorable interest rates. Throughout the following summer QNI and

Kalil continued to negotiate the sale of SCC’s television assets.

      On or about August 25, 2000, Schmidt introduced the Shockleys to

Integrated Capital Associates (ICA), a firm that facilitated stock sales of

companies. During this meeting ICA discussed the possibility of using an

intermediary transaction (midco) strategy. In September 2000 the SCC board

decided to sell the company’s stock to an ICA affiliated entity. T. Shockley

informed Kalil of the SCC board’s decision, and he continued to negotiate with

QNI on behalf of the ICA affiliate. Eventually, on October 6, 2000, QNI sent a

nonbinding letter of intent to ICA in which QNI offered to purchase the SCC
                                        - 17 -

[*17] television assets from an undisclosed seller for $167 million. After further

negotiation QNI increased the purchase price to $171 million in a revised

nonbinding letter of intent, which it faxed to ICA on October 27, 2000 (QNI

revised offer). Kalil accepted the QNI revised offer on behalf of an undisclosed

seller on October 31, 2000.

      Following Kalil’s acceptance of the QNI revised offer they continued to

negotiate adjustments to the purchase price to account for various issues. These

issues included, among other things: (1) an anticipated renegotiation of a network

affiliation agreement with American Broadcasting Corp. that would decrease

network compensation; (2) Federal Communications Commission (FCC)

regulations that prohibited QNI’s purchase of SCC’s television station in

Rochester, Minnesota (Rochester television station), because of a market conflict;

(3) the transfer of the Rochester television station to TSTT, LLC (TSTT), a new

Shockley-controlled entity formed for the purpose; (4) granting QNI an option to

purchase the Rochester television station at a later date; and (5) costs payable to

key SCC managers under SCC’s phantom stock deferred compensation plan.

      By the end of December 2000 an entity named NCAC, which ICA formed

for the purpose, entered into three agreements: (1) a stock purchase agreement

(SPA) with the SCC shareholders dated December 28, 2000; (2) an asset purchase
                                       - 18 -

[*18] agreement with QNI (QNI APA) dated December 29, 2000; and (3) an asset

purchase agreement with TSTT (TSTT APA) dated December 29, 2000. The SPA

provided that the SCC shareholders would sell to NCAC 100% of the SCC stock

for a purchase price of $117 million, subject to certain adjustments. The QNI

APA involved the sale of the Wisconsin television stations and production

company by NCAC to QNI for $168 million, subject to certain adjustments

discussed above, and the TSTT APA involved the sale of the Rochester television

station by NCAC to TSTT for $3 million. Each of these agreements specified that

it was to be governed by the laws of the State of Wisconsin.

      On May 31, 2001, the closings of the sale of SCC stock and the sale of SCC

assets took place at one of the law firms representing ICA. Immediately before the

sale of 100% of SCC stock to NCAC the directors representing petitioners

resigned from their SCC board positions as of that date. Petitioners neither raised

the possibility of exercising their right of redemption nor sought compensation for

surrendering such right at any point before the SPA closing date. Over an

approximately three-hour period on the closing date ICA transferred SCC’s stock

and assets to a series of entities that it had formed with regard to the SPA and QNI

APA, which QNI merged, renamed, and recharacterized. (Further details of the
                                         - 19 -

[*19] entities and actions involved are not material to our decision here but may be

found in Shockley III, at *35-*40.)

Sale of SCC’s Radio Assets

      On March 29, 2001, Midwest Communications, Inc. (Midwest), a

Wisconsin corporation, made an offer to purchase the SCC radio assets from

NCAC for $7.5 million. NCAC, through an ICA executive, accepted the offer on

March 31, 2001. Midwest and NCAC entered into an asset purchase agreement

(Midwest APA) on May 25, 2001, with respect to the SCC radio assets. On

September 21, 2001, NCAC’s successor entity sold SCC’s radio stations to

Midwest pursuant to the Midwest APA.

Distributions

      After May 31, 2001, petitioners received distributions with regard to the

sale of their SCC stock as follows:

     Date of
   distribution       SWIB               Alta V         Alta Sub        Allsop

 May 31, 2001     $22,245,176.27      $5,639,082.89   $3,353,578.30 $19,799,907.93
 July 24, 2001        717,779.00        181,955.00      108,209.00      638,878.00
 Sept. 10, 2001       511,814.25        129,743.32       77,158.71      455,553.82
 Sept. 25, 2001     1,636,582.39        414,868.54      246,723.48    1,456,683.47
 Oct. 30, 2001         29,139.48           7,386.77       4,392.93       25,936.37
                                        - 20 -

[*20]
 Dec. 21, 2001          98,298.49       24,918.36        14,819.02        87,493.18
 Jan. 25, 2002          24,540.70        6,220.99         3,699.64        21,843.10
 Dec. 20, 2002          35,633.20        9,032.91         5,371.89        31,716.28
 June 6, 2003        2,482,037.00      629,189.00       374,180.00     2,209,203.00
 Oct. 29, 2003         486,882.00      123,423.00        73,400.00       433,362.00
   Total            28,267,882.78    7,165,820.78     4,261,532.97    25,160,577.15

Reporting and Examination

        On or about February 24, 2002, the IRS received SCC’s professionally

prepared Form 1120, U.S. Corporation Income Tax Return, for its short tax year of

January 1 through May 31, 2001. The Form 1120 listed a Washington, D.C.,

mailing address for SCC and reported that SCC had zero assets by the end of its

2001 tax year and zero tax due. It also reported that on May 31, 2001, SCC had

merged into an ICA affiliated entity named Shockley Delaware Corp. (SDC) and

that immediately thereafter SDC converted into a Delaware limited liability

company resulting in SCC’s liquidation and tax-free distribution under

section 332.

        On February 18, 2005, the IRS issued multiple notices of deficiency relating

to SCC’s short tax year ended May 31, 2001. On May 25, 2005, the Shockleys

filed a petition in response to the notice that was sent to them at their then home
                                          - 21 -

[*21] address in Wisconsin. On April 26, 2007, that case at docket No. 9699-05

was dismissed for lack of jurisdiction because SCC lacked legal capacity to

proceed in the case through the Shockleys. On September 6, 2007, the IRS

assessed Federal income tax, an addition to tax, and a penalty against SCC for

2001 as follows:

             Tax year                            Penalty     Addition to tax
              ending         Deficiency         sec. 6662    sec. 6651(a)(1)

           May 31, 2001     $41,566,515         $8,313,303       $2,078,276

      Thereafter, the IRS undertook transferee examinations of eight of the largest

SCC shareholders who sold their SCC shares to NCAC on May 31, 2001,

including petitioners. The IRS sent to petitioners notices of transferee liability on

August 21, 2008. In these notices the IRS stated that petitioners were liable for

SCC’s unpaid deficiency for Federal income tax, additions to tax, and a penalty as

follows:

                                                       Additions to tax
    Tax year                         Penalty          Sec.           Sec.
     ending         Deficiency      sec. 6662      6651(a)(1)    6651(a)(2)

 May 31, 2001      $41,566,515 $8,313,303           $2,078,276    $10,183,796

The transferee notices also stated that petitioners were liable for interest.
                                          - 22 -

[*22]                                  OPINION

        Petitioners’ contend that: (1) expiration of the period of limitations under

section 6901(c) precludes respondent from assessing transferee liability against

them for SCC’s tax year ending May 31, 2001; (2) if it is determined that the

notices were timely, they are not liable as transferees under Wisconsin State law

for their respective portions of the unpaid determined and assessed deficiency,

additions to tax, penalty, and interest with respect to SCC’s Federal corporate

income tax for 2001; (3) their liability is reduced to the extent they are good faith

transferees by the amount of reasonably equivalent value they provided to SCC;

and (4) respondent failed to meet his burden of proving that they are liable as

transferees for the penalty assessed against SCC. Respondent disagrees and seeks

to collect the tax from petitioners through the procedural provisions of section

6901.

        Section 6901 addresses transferee liability and provides that the liability, at

law or in equity, of a transferee of property of a taxpayer owing Federal income

tax “shall * * * be assessed, paid, and collected in the same manner and subject to

the same provisions and limitations as in the case of the taxes with respect to

which the liabilities were incurred”. Sec. 6901(a). Transferee liability under

section 6901 includes related additions to tax, penalties, and interest owed by the
                                        - 23 -

[*23] transferor. Kreps v. Commissioner, 

, 670 (1964), aff’d, 

(2d Cir. 1965). This Court has jurisdiction over transferee liability. See

secs. 6901(f), 6902; Rule 13(a).

I. Limitation on Assessment

      As a threshold matter we address petitioners’ argument that the period of

limitations under section 6901(c) precludes respondent from assessing transferee

liability against them for SCC’s tax year ending May 31, 2001. Respondent

disagrees and urges us to follow the decision of the Court of Appeals for the

Eleventh Circuit in Shockley II. The Court of Appeals in Shockley II reversed our

decisions entered in accordance with Shockley I, in which we decided the period

of limitations issue in favor of the Shockleys. The parties agreed that these cases

may be decided on the Shockley stipulations and evidentiary record previously

considered by the Court of Appeals in Shockley II. Petitioners have neither cited

additional authority nor provided additional evidence to supplement the Shockley

record in support of their argument. The rationale of the Court of Appeals opinion

applies equally to the notices sent to these petitioners. We see no merit in a

different result by revising the Court of Appeals’ holding that the notices of

transferee liability were timely.
                                        - 24 -

[*24] II. Transferee Liability

      Petitioners assert that they are not liable as transferees for the debts of SCC

under Federal and Wisconsin law. Section 6901 does not independently impose

tax liability upon a transferee but merely provides a procedure through which the

IRS may collect unpaid tax--owed by a transferor of assets--from the transferee

who received those assets. Commissioner v. Stern, 

, 42 (1958)

(addressing section 311 of the Internal Revenue Code of 1939, the predecessor of

section 6901). Thus an independent basis for liability must be available, and this

basis is generally found under applicable State law or equity principles. Sec.

6901(a)(1)(A); Ginsberg v. Commissioner, 

, 667 (2d Cir. 1962), aff’g

(1961).

      Accordingly, three requirements must be met for the Commissioner to

assess transferee liability against a party under section 6901: (1) the party must be

subject to liability under applicable State law or equity principles, (2) the party

must be a transferee under section 6901 pursuant to Federal law or equity

principles, and (3) the transferor must be liable for the unpaid tax. Swords Tr. v.

Commissioner, 

, 336 (2014); see Cullifer v. Commissioner, T.C.

Memo. 2014-208, at *43, aff’d, 651 F. App’x 847 (11th Cir. 2016). The

Commissioner bears the burden of proving that a party is liable as a transferee of
                                        - 25 -

[*25] the taxpayer’s property but not of proving that the taxpayer is liable for the

tax. See secs. 6902(a), 7454(c); Rule 142(d).

      The determinations of petitioners’ substantive liability under State law and

transferee status under Federal law are separate and independent determinations.

See Feldman v. Commissioner (Feldman II), 

, 458 (7th Cir. 2015),

aff’g Feldman v. Commissioner (Feldman I), T.C. Memo. 2011-297; Salus Mundi

Found. v. Commissioner, 

, 1012 (9th Cir. 2014), rev’g and

remanding T.C. Memo. 2012-61; Frank Sawyer Tr. of May 1992 v. Commissioner,

, 605 (1st Cir. 2013), rev’g and remanding T.C. Memo. 2011-298;

Starnes v. Commissioner, 

, 429 (4th Cir. 2012), aff’g T.C. Memo.

2011-63. We will consider whether petitioners are liable as transferees under

State law before determining the application of section 6901.

      A. State Law Liability Requirement

      As the transactions took place in Wisconsin, we use Wisconsin State law to

determine whether petitioners are liable, as transferees, for the unpaid tax of SCC.

See Commissioner v. 

. Wisconsin has adopted the Uniform

Fraudulent Transfer Act (WIUFTA), codified at chapter 242 of the Wisconsin

Statutes. See Wis. Stat. secs. 242.01 to 242.11 (2000). WIUFTA defines

“transfer” very broadly as “every mode, direct or indirect, absolute or conditional,
                                        - 26 -

[*26] voluntary or involuntary, of disposing of or parting with an asset or an

interest in an asset, and includes payment of money, release, lease and creation of

a lien or other encumbrance.” 

Where a debtor transfers

property to a transferee and thereby avoids creditor claims, WIUFTA provides

creditors with certain remedies against the transferee. See 

see also

(“‘Claim’ means a right to payment, whether or not the right is

reduced to judgment, liquidated, unliquidated, fixed, contingent, matured,

unmatured, disputed, undisputed, legal, equitable, secured or unsecured.”),

(4) (“‘Creditor’ means a person who has a claim.”), (6) (“‘Debtor’ means a person

who is liable on a claim.”). The Wisconsin Supreme Court has affirmed that

WIUFTA reflects a strong desire to protect creditors. See Badger State Bank v.

Taylor (Badger State Bank II), 

, 448 (Wis. 2004), aff’g Badger

State Bank v. Taylor (Badger State Bank I), 

(Wis. Ct. App.

2003).

      Under WIUFTA transferee liability “is itself flexible and looks to equitable

principles like ‘substance over form,’ just like the federal tax doctrines”.

Feldman 

. The Court of Appeals for the Seventh Circuit

instructed that “Wisconsin has long followed the general rule that ‘[e]quity looks

to substance and not to form’” and noted that WIUFTA explicitly incorporates
                                        - 27 -

[*27] equitable principles under Wis. Stat. sec. 242.10. 

v.

Kalscheuer, 

, 918 (Wis. 1926) (stating that equity “is loath to lend

itself to the accomplishment of a purpose different from that which the transaction

usually imports”)); see Wis. Stat. sec. 242.10 (“Unless displaced by this chapter,

the principles of law and equity * * * supplement this chapter.”). Wisconsin

courts appear to apply the substance over form doctrine in the same manner as

Federal courts. See, e.g., Wis. Dep’t of Revenue v. River City Refuse Removal,

Inc., 

, 363 n.19 (Wis. Ct. App. 2006) (stating that the substance

over form principle governs the treatment of a taxpayer’s activities and

transactions for tax purposes while relying on Miller v. Tax Comm’n of Wis., 

, 569 (Wis. 1928) (citing United States v. Phellis, 

, 168

(1921)), for the proposition that “courts will look beyond the mere form to the

substance of a transaction for the purpose of ascertaining its true nature”), aff’d,

(Wis. 2007).

      Under WIUFTA, creditors, such as respondent, have the burden to prove the

elements of transferee liability by clear and convincing evidence. See Kaiser v.

Wood Cty. Nat’l Bank & Tr. Co. (In re Loyal Cheese Co.), 

, 518 (7th

Cir. 1992); Mann v. Hanil Bank, 

, 950 (E.D. Wis. 1996). There

is no dispute regarding our prior opinion disregarding the form of the transactions
                                        - 28 -

[*28] or our finding that in substance a transfer from SCC (the transferor) to SCC

shareholders (the transferees) occurred. Instead respondent argues that petitioners

failed to provide reasonably equivalent value to SCC and are therefore liable as

transferees under Wis. Stat. sec. 242.05(1). Petitioners disagree and argue that by

surrendering their right of redemption in exchange for the distributions they

provided reasonably equivalent value to SCC.

      Wis. Stat. sec. 242.05(1) provides:

      A transfer made or obligation incurred by a debtor is fraudulent as to
      a creditor whose claim arose before the transfer was made or the
      obligation was incurred if the debtor made the transfer or incurred the
      obligation without receiving a reasonably equivalent value in
      exchange for the transfer or obligation and the debtor was insolvent at
      that time or the debtor became insolvent as a result of the transfer or
      obligation. [Emphasis added.]

Under this section, any transfer must be viewed exclusively from the perspective

of the creditor--the degree of knowledge or beliefs or good faith of the putative

transferees regarding the nature of the transfer are not relevant to the analysis.

Subjective intent and good faith play no role in the application of WIUFTA’s

constructive fraud provisions. Feldman 

-460 (“[T]he

shareholders’ extensive emphasis on their due diligence and lack of knowledge of

illegality is simply beside the point.”); see also Badger State Bank 

(“The transferee’s subjective state of mind does not play a role in resolving
                                        - 29 -

[*29] the present case under Wis. Stat. § 242.05(1).”); Badger State Bank 

(“[T]he good-faith defense under [Wis. Stat.] § 242.08(1) applies

only to claims made under Wis. Stat. § 242.04(1)(a).”). As a constructive fraud

provision Wis. Stat. sec. 242.05(1) focuses on an objective result, meaning that

there is no requirement that transferees be guilty of any fraud. Feldman 

(citing Badger State Bank 

).

      Whether reasonably equivalent value was received by the transferor is a

question of fact. See Feldman I, slip op. at 38. While it does not define

“reasonably equivalent”, WIUFTA provides that “[v]alue is given for a transfer or

an obligation if, in exchange for the transfer or obligation, property is transferred

or an antecedent debt is secured or satisfied”. Wis. Stat. sec. 242.03(1); see also

Feldman I, slip op. at 38 (explaining that the phrase “reasonably

equivalent value” is derived from the fraudulent transfer provision of 11 U.S.C.

section 548, and cases construing this provision offer additional guidance (citing

Leibowitz v. Parkway Bank & Tr. Co. (In re Image Worldwide, Ltd.), 

, 577 (7th Cir. 1998))). The “test used to determine reasonably equivalent

value in the context of a fraudulent conveyance requires the court to determine the

value of what was transferred and to compare it to what was received.” Feldman I,
                                         - 30 -

[*30] slip op. at 38-39 (quoting Barber v. Golden Seed Co., 

, 387

(7th Cir. 1997)).

      The record reflects that petitioners collectively received distributions of

over $64 million from the SCC asset sale proceeds. In exchange for this

petitioners claim to have surrendered their right of redemption along with their

SCC stock. According to the express terms of the SCC shareholders’ agreement

petitioners’ right of redemption vested immediately. However, this agreement

limited petitioners’ ability to exercise such right. The earliest date that petitioners

could exercise their right of redemption was 6-1/2 years after its closing date--

approximately one year after the closing date of the SPA and NCAC APA. While

the record in these cases extensively documents the negotiations leading up to the

sale of SCC’s assets, it is silent as to whether petitioners ever discussed

surrendering their right of redemption at any point during that process.

Furthermore, petitioners never discussed the specific value of their right of

redemption let alone sought a formal valuation. This court has long declined to

accord value to items incidental to a transaction that were “never actually dealt

with as a separate item in the business transaction, never bargained for, [and]

never evaluated.” Payne v. Commissioner, 

, 531 (1954) (holding that

total consideration was paid for a newspaper’s capital stock and the value of a
                                         - 31 -

[*31] covenant not to compete was not bargained for and was incidental to the

transfer of the newspaper’s goodwill).

      We conclude that petitioners’ incidental surrender of their right of

redemption as part of the transfer of their SCC shares constitutes neither value nor

reasonably equivalent value. We have previously held that SCC received nothing

in exchange, or, at best, received petitioners’ shares of SCC stock, which--because

of the distributions essentially liquidating SCC--were worthless. It follows under

the facts presented here that petitioners’ right of redemption was equally

worthless. Thus, the deemed transferor SCC did not receive value, reasonably

equivalent or otherwise, in exchange for the proceeds from the sale of its assets.

      There is no dispute regarding SCC’s liability for the Federal income tax

arising from the asset sale, SCC’s insolvency after the transfer, the existence of

respondent’s claim, or respondent’s creditor status at the time of the transfers in

question. Accordingly we conclude that petitioners are liable for such Federal

income tax as SCC’s transferees under Wisconsin State law.

      Petitioners argue in the alternative an affirmative defense that they were

good faith transferees under Wis. Stat. sec. 242.08(4) and therefore their liability

must be reduced by the value they claim to have transferred to SCC. This section

provides: “Notwithstanding voidability of a transfer or an obligation under this
                                         - 32 -

[*32] chapter, a good-faith transferee or obligee is entitled, to the extent of the

value given the debtor for the transfer or obligation, to any of the following: * * *

A reduction in the amount of the liability on the judgment.” Wis. Stat. sec.

242.08(4)(c). In view of our holding that petitioners did not exchange value to

SCC we need not consider whether petitioners were good faith transferees under

Wis. Stat. sec. 242.08(4).

      B. Federal Transferee Requirement

      For purposes of section 6901, the term “transferee” includes, inter alia,

donee, heir, legatee, devisee, distributee, and shareholder of a dissolved

corporation. See sec. 6901(h); sec. 301.6901-1(b), Proced. & Admin. Regs. The

principle of substance over form applies to determinations of transferee liability

issues. See generally Scott v. Commissioner, T.C. Memo. 1998-426, aff’d, 

(10th Cir. 2001). In accordance with the substance over form analysis

we applied in Shockley III, petitioners, as distributees of SCC, are determined to

be transferees pursuant to section 6901.

III. Penalty and Additions to Tax

      Even if they may be held liable for SCC’s unpaid tax, petitioners contend

that the penalty and additions to tax asserted against SCC cannot be collected from

them as its “transferee” under Wisconsin law. Specifically, petitioners argue that
                                        - 33 -

[*33] the penalty and additions to tax are not “claims” that existed before SCC’s

deemed transfer of the proceeds from the sale of the company’s assets, and

therefore constructive fraud analysis under Wis. Stat. sec. 242.05(1) is not

appropriate. Instead petitioners argue that in order to hold them liable as

transferees for SCC’s penalty and additions to tax the Commissioner must prove

that: (1) SCC transferred the asset sale proceeds with actual intent to hinder, delay

or defraud any of its creditors under Wis. Stat. sec. 242.04(1), and (2) petitioners

(as transferees) had actual or constructive knowledge that SCC would not pay its

obligations. According to petitioners’ theory, respondent proved neither element

and therefore failed to meet the burden of proof. Respondent disagrees with

petitioners’ arguments regarding the burden of proof.

      Wis. Stat. sec. 242.04(1) provides:

      A transfer made or obligations incurred by a debtor is fraudulent as to
      a creditor, whether the creditor’s claim arose before or after the
      transfer was made or the obligation was incurred, if the debtor made
      the transfer or incurred the obligation:

             (a) With actual intent to hinder, delay or defraud any creditor
      of the debtor; or

           (b) Without receiving a reasonably equivalent value in
      exchange for the transfer or obligation, and the debtor:
                                        - 34 -

[*34]         1. Was engaged or was about to engage in a business or a
        transaction for which the remaining assets of the debtor were
        unreasonably small in relation to the business or transaction; or

              2. Intended to incur, or believed or reasonably should have
        believed that the debtor would incur, debts beyond the debtor’s ability
        to pay as they became due.
              [Emphasis added.]

This section includes two possible methods for creditors to establish that a transfer

was fraudulent: actual fraud under Wis. Stat. sec. 242.04(1)(a) and constructive

fraud under Wis. Stat. sec. 242.04(1)(b). While each method is available to both

present and future creditors, only the actual fraud method requires a creditor to

prove that the debtor (transferor) acted with actual intent to hinder, delay, or

defraud any creditor. 

The constructive fraud method

requires the creditor to prove that the debtor did not receive reasonably equivalent

value in exchange for the transfer and the transfer left the debtor with insufficient

assets. 

        Respondent has elected to hold petitioners liable as transferees for SCC’s

penalty, additions to tax, and interest under the constructive fraud method of Wis.

Stat. sec. 242.04(1)(b). Because this method is available to both present and

future creditors, we need not address petitioners’ arguments whether the penalty

and additions to tax constitute present or future claims. 

Under
                                        - 35 -

[*35] the constructive fraud method of Wis. Stat. sec. 242.04(1)(b) respondent

need not prove that SCC (the debtor) acted with actual intent to hinder, delay, or

defraud the IRS. We have decided that SCC did not receive value, let alone

reasonably equivalent value, for the transfer. See supra p. 31. Accordingly,

respondent has met his burden to establish that petitioners are liable as transferees

for the penalty and additions to tax asserted against SCC.

      Petitioners incorrectly attempt to import the transferee’s knowledge or

belief into respondent’s burden of proof. The plain text of Wis. Stat. sec. 242.04

focuses the inquiry on the debtor’s (transferor’s) knowledge or belief at the time of

the transfer and not on that of the transferee. A transferee’s good faith,

knowledge, or reasonable belief is relevant only when considering affirmative

defenses available to transferees under WIUFTA. See Wis. Stat. sec. 242.08

(defenses, liability, and protection of transferee); see also Feldman 

-460 (interpreting constructive fraud under Wis. Stat. secs. 242.04(1)(b) and

242.05). Petitioners bear the burden of proof when raising such defenses.

      Petitioners’ cited cases are not to the contrary. Each cited case involves an

attempt to collect penalties and additions to tax arising from the transferor’s

posttransfer conduct either from transferees or successor transferees.

Significantly, in each case requiring the Commissioner to prove actual fraudulent
                                         - 36 -

[*36] intent the debtors (transferors) concluded the transfers to the transferees or

successor transferees before engaging in the conduct that gave rise to the penalties

and additions to tax. See Stanko v. Commissioner, 

, 1088 (8th Cir.

2000) (requiring Commissioner to prove fraudulent intent where transfer made

approximately one year before transferee’s ex-husband’s company dissolved and

subsequently failed to file a Federal income tax return giving rise to penalties),

rev’g T.C. Memo. 1996-530; Buckrey v. Commissioner, T.C. Memo. 2017-138,

at *11, *19-*20 (noting the Commissioner was required to prove fraudulent intent

where penalties related to the transferor’s engagement in a Son of BOSS tax

shelter after, and unrelated to, the transfer to transferee shareholders); see also

Frank Sawyer Tr. of May 1992 v. Commissioner, T.C. Memo. 2014-128 (finding

trust was good faith transferee and limiting liability to the extent of value given to

debtor), supplementing T.C. Memo. 2014-59; cf. Feldman 

(finding shareholders liable for tax and penalties where “the [entire] transaction

was premised on the assumption that the taxes would not be paid”), aff’g T.C.

Memo. 2011-297; Tricarichi v. Commissioner, T.C. Memo. 2015-201, at *5-*6,

*61-*63 (finding that transferee, who was company president and sole

shareholder, engaged in intermediary transaction and was liable for taxes and

penalties, and distinguishing Stanko as interpreting Nebraska law before adoption
                                        - 37 -

[*37] of Uniform Fraudulent Transfers Act), aff’d, 752 F. App’x 455 (9th Cir.

2018).

      The facts in these cases are akin to those involved in Tricarichi. Petitioners

held substantial percentages of the outstanding stock and were each represented on

the SCC board. The SCC board considered the various sale options presented by

Schmidt and ICA and elected to proceed with an intermediary transaction arranged

by ICA. Petitioners were also represented throughout the transaction.

Significantly the intermediary transaction could not have taken place without

petitioners’ consent. Even if the other SCC board members and shareholders had

elected to proceed, they did not control a sufficient number of shares to compel

petitioners to participate pursuant to the SCC shareholders’ agreement drag-along

provision. Similar to the transferee in Tricarichi, petitioners were full participants

in SCC’s conduct resulting in the penalty and additions to tax at issue. See

Tricarichi v. Commissioner, at *6-*8.

      Petitioners specifically challenge SCC’s liability for an addition to tax under

section 6651(a)(2). Respondent has conceded that SCC is not liable for an

addition to tax under section 6651(a)(2). However, in doing so respondent

attempts to assert in respondent’s reply brief that SCC is liable for an addition to

tax under section 6651(a)(3). On the basis of the record respondent’s seriatim
                                         - 38 -

[*38] answering brief is the first instance where he asserted an addition to tax

under section 6651(a)(3). None of the notices sent to SCC, the Shockleys, or

petitioners include any reference to this addition. Respondent has not moved to

file an amended answer to the complaint. New matters raised for the first time in

brief will not be considered. Neither SCC nor petitioners are liable for additions

to tax under either section 6651(a)(2) or (3).

      We have considered petitioners’ arguments relating to the remaining

accuracy-related penalty under section 6662(a), addition to tax under section

6651(a)(1), and interest, and they are moot, irrelevant, or without merit.

Petitioners are liable for the remaining penalty and addition to tax. We conclude

that petitioners’ liability for interest is to be calculated in accordance with our

decision in Shockley IV.

      We have considered all of the parties’ arguments, and, to the extent not

addressed above, we conclude that they are moot, irrelevant, or without merit. To

reflect the foregoing,


                                                  Decisions will be entered

                                        under Rule 155.