Originally published on Forbes.com.
The IRS has won another round in its pursuit of a share of the Diebold fortune with the Ninth Circuit decision in the case of the Salus Mundi Foundation. This one may prove to be a Pyrrhic victory, as it seems that the Salus Mundi cupboard may well be bare. Here’s the story.
The Diebold Saga
One of the easiest ways to make a small fortune is to have a large fortune inside a C corporation which liquidates. That is more or less what the stewards of the Diebold fortune were trying to avoid around the turn of the millennium. A corporation called Double-D Ranch owned valuable real estate and stock in publicly traded companies including a large position in American Home Products. The founder of the family fortune Albert Diebold died in 1964 when having all that stuff in a personal holding company was probably still a good idea. Besides you could always do a 337 liquidation and avoid corporate level tax on a gain. Apparently the Diebold heirs did not have somebody on the ball when the Tax Reform Act of 1986 changed the landscape.
When the urge to liquefy and divide finally struck in the late nineties, the Diebold advisers solved the $81 million corporate tax problem created by liquidating over $300 million in assets by piling one sketchy transaction on top of another. Rather than liquidate, Double-D stock was sold to a company called Shap II. Since Shap II was, in effect, “buying” the corporate tax liability, the Double-D shareholders were happy to give Shap II a 4.5% discount from the fair market value of the underlying assets. That is sketchy transaction number one, commonly called a Midco transaction.
The position of the Diebold shareholders was that the next sketchy transaction was none of their business. Shap II did a Son-of- Boss deal, the go to transaction for the rich, famous and powerful who thought that taxes were just for the little people during the late nineties and early oughts. Shap II was late into the Son-of-Boss game, so that transaction got picked up but the IRS found that by then that the Shap II cupboard was bare. So it went after the Double-D shareholders on the theory that they knew or should have known that the money they received for the Double-D stock included corporate tax that Shap II was going to weasel out of. There has been a lot of litigation generated from the assertion of “transferee liability” against Diebold shareholders. The Ninth Circuit decision in the case of Salus Mundi Foundation, released on the Monday before Christmas, is the latest.
The Decision
All of the stock in Double-D had been owned by the Dorothy R. Diebold Marital Trust. In conjunction with the grand plan, 1/3 of the stock had been transferred to the Diebold Foundation. Not long after the sale the Diebold Foundation liquidated into three other foundations, one of which is the Salus Mundi Foundation. The Ninth Circuit following the Second Circuit decision in the case of one of the other of the three new foundations, which is confusingly called Diebold, found that there is transferee liability at least as far as the original Diebold Foundation goes. So the case is going back to the Tax Court to determine if the second step can be taken to tag Salus Mundi with the sins of its father foundation and whether the IRS caught up with it in time.
In short, we conclude that the two prongs of § 6901 are separate and independent; an alleged transferee’s substantive liability is determined solely with reference to state law, without any threshold requirement that the disputed transactions be recast under federal law. We also conclude that the shareholders’ conduct shows that they had constructive knowledge of the fraudulent scheme; we therefore collapse the series of transactions and hold that the state law liability prong of the 26 U.S.C. § 6901 inquiry was satisfied in this case. We remand to the Tax Court to determine in the first instance: (1) Salus Mundi’s status as a transferee of a transferee under the federal law inquiry of 26 U.S.C. § 6901; and (2) whether the IRS assessed liability within the applicable limitations period.
Dammit Jim
As I often remark, I am a tax blogger not an investigative reporter, but I could not help but develop an interest in what Salus Mundi, which loosely translates as “Health of the World”, has been up to. Salus Mundi was run by A. Richard Diebold Jr. who died earlier this year.
Dr. Diebold led a brilliant academic career as a linguistic anthropologist specializing in comparative and historical Indo-European Studies, theoretical linguistics, psycholinguistics and transcultural psychiatry. His work with Mesoamerican ethnic groups, in particular with the Huave people, proved crucial to the communities’ cultural survival.
As illustrious an academic as he was, he found a calling as a philanthropist, founding and directing the Salus Mundi Foundation, which focused on funding Indo-European studies, but supported many local causes that were dear to his heart.
In his personal life he became a devoted Father to Deborah and a doting Grandfather to JM. A man of a thousand stories, he enjoyed none more than Tolkien’s journeys to Middle Earth. He is an example to those who seek to live life true to themselves.
Who To Root For?
Particularly when you throw in the Tolkein that made it hard for me. My general principle is to root for the taxpayer, but to switch to the IRS when the taxpayer is being sketchy. Combining Midco with Son-of-Boss is double sketchy, but who can be mad at a foundation focused on Indo-European studies run by somebody who likes Frodo and Sam? I think I’ll stay neutral.
What Has Salus Mundi Been Up To?
This is the part that I find a either amusing or disconcerting depending on my mood. On its most recent Form 990-PF for the year ended 9/30/13, Salus Mundi shows assets of $76,542 – all cash. So it would seem that the IRS is going to find another bare cupboard when it finally comes knocking on the Salus Mundi door. For the last three years Salus Mundi has essentially been running a white collar jobs program for the lawyers of Baker & McKenzie LLP , who are listed as the attorneys on the the trasferee liability case. Professor Diebold has donated over $600,000 to the foundation which was pretty much used to pay Baker & McKenzie.
Ubi Sunt With All Those Dollars
The Form 990-PF for the year ended 9/30/08 is not available on guidestar.org to cheapskates like me, but you can tell from the later forms that over $11 million flowed out of Salus Mundi in what must have been a banner year for Indo-European studies. Evidence of Salus Mundi munificence is scattered across the internet. There is for example the A. Richard Diebold Center for Indo-European Language and Culture at the University of Texas at Austin
Salus Mundi’s support for EIEOL resulted in additional publications, including the online books in our Indo-European Languages and Historical Linguistics series, our online metrically restored Rigveda, and pre-publication work underlying the late Dr. Winfred P. Lehmann’s book Pre-Indo-European (Journal of Indo-European Studies Monograph #41; Washington, DC: Institute for the Study of Man)
I found one project backed by Salus Mundi a little disturbing New Perspectives on Historical Latin Syntax Constituent Syntax” Adverbial Phrases, Adverbs, Mood, Tense . What was wrong with the old perspectives? If “Veni, vidi, vici” was good enough for Julius Caesar, it’s good enough for me.
So the interesting question is what will happen if transferee liability is found against Salus Mundi. There may be some theory that could be used to attack the estate of Professor Diebold for handing out all the Foundations resources while the sword of Damocles was over its head. Something tells me that the IRS will not be able to chase the recipients of the Foundation’s largess. You never know, though. If in a couple of years the IRS auction notices include a large pile of Indo-European scholarly works, you’ll know what happened.