Tucson couple face $15M tax liability in 2001 sale of radio stations

PHOENIX — A nearly two-decade-old sale of several Tucson radio stations is coming back now with big income-tax consequences for the former owners.

The 9th U.S. Circuit Court of Appeals ruled Tuesday that the sale of the stock of Slone Broadcasting in 2001 was set up in a way to avoid paying federal income tax on the money received from a separate sale of the stations. In fact, the judges said, Berlinetta Inc., which bought Slone’s stock, had no assets to pay the income taxes from the separate sale of Slone’s radio stations.

What that means, according to the court, is that Tucsonan Jim Slone, his wife, Norma, and the family trust, who got cash from the deal, are now responsible for the $15.3 million tax liability.

The ruling caught Jim Slone by surprise.

“I’m totally shocked,” he told Capitol Media Services. “I’ve been in Tax Court for 11 years. Every Tax Court that I’ve been through has ruled in my favor.”

The 2001 deal involved the sale of KIIM-FM, KHYT-FM, KOAZ-FM, KCUB-AM and KTUC-AM. As announced at the time, Las Vegas-based Citadel Communications Corp. paid Slone Broadcasting $61 million in cash and $2 million in Citadel stock.

But that wasn’t the end of it.

According to court records, in a separate deal, the couple sold all of Slone Broadcasting’s stock to Berlinetta Inc. which assumed the company’s income tax liability from the proceeds it received from the sale of the stations. Berlinetta, using borrowed funds, paid Jim and Norma Slone an amount representing the net value of Slone Broadcasting after the sell-off of the radio stations plus a premium representing about two-thirds of Slone Broadcasting’s tax liability.

Berlinetta and Slone Broadcasting then merged into a new company called Arizona Media Holdings, purportedly to engage in debt collection.

But appellate Judge Mary Schroeder, writing for the court, said this new company had no assets with which to pay the taxes due from the original sale of the radio stations. In fact, she said, it was purposely set up that way.

So the Internal Revenue Service went after Jim and Norma Slone, the recipients of the funds from the original sale.

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In arguing against their liability, an attorney for the couple said the proceeds they received for the stock came from Berlinetta and not Slone Broadcasting. And a Tax Court judge concluded the couple did not know the scheme was done to avoid paying taxes.

Schroeder, however, said the purpose of the stock sale was tax avoidance and Jim and Norma Slone “would have been on notice that Berlinetta never intended to pay Slone Broadcasting’s tax obligation.”

“It is not disputed that Slone Broadcasting, following its asset sale to Citadel, was not engaged in any business activities,” she wrote. What it had, Schroeder wrote, was the proceeds from the sale of the stations — money that eventually went to the couple — and the $15 million tax liability.

“When petitioners sold the stock to Berlinetta, along with that tax liability, petitioners received, in substance, an ostensibly tax-free liquidating distribution from Slone Broadcasting,” the judge said. “There was no legitimate economic purpose other than to avoid paying the taxes that would normally accompany a liquidating asset sale and distribution to shareholders.”

Schroeder also said the whole financing plan demonstrates that “the deal was only about tax avoidance.”

She noted that Berlinetta borrowed the money to make the stock purchase.

She said if Arizona Media had intended to be a legitimate business enterprise, it could have retained sufficient capital to set up and run that debt-collection service and cover the tax obligation.

“Instead, the financing was structured so that, after the merger, Slone Broadcasting’s significant cash holdings went immediately out the door to repay the loan Berlinetta used to finance its purchase of the Slone Broadcasting stock and tax liability,” Schroeder said.

Schroeder said there’s another reason to believe the whole purpose was to avoid taxes.

“Petitioners’ own advisors expressed surprise over this transaction,” she wrote. “One of petitions’ lawyers testified that in his nearly 20 years of private practice he ‘had never seen a transaction like this.’”