US v. McDonald & Eide, Inc.

• Decision Date: 21 September 1987
• Docket Number: Civ. A. No. 86-351-JLL.
• Citation: 670 F. Supp. 1226
• Court: U.S. District Court — District of Delaware
• Parties: UNITED STATES of America, Plaintiff, v. McDONALD & EIDE, INC. and Frank A. Gunnip, Liquidating Trustee for the Benefit of the Share Equivalent Unit Holders of the Receivership Estate of McDonald & Eide, Inc., Defendants.

670 F. Supp. 1226

UNITED STATES of America, Plaintiff, v. McDONALD & EIDE, INC. and Frank A. Gunnip, Liquidating Trustee for the Benefit of the Share Equivalent Unit Holders of the Receivership Estate of McDonald & Eide, Inc., Defendants.

Civ. A. No. 86-351-JLL.

United States District Court, D. Delaware.

September 21, 1987.

Michael C. Durney, Acting Asst. Atty. Gen. Tax Div., Edward J. Snyder and Michael J. Salem of the U.S. Dept. of Justice, Washington, D.C., and William C. Carpenter, Jr., U.S. Atty., and Edmond Falgowski, Asst. U.S. Atty., Wilmington, Del., for plaintiff.

Leonard S. Togman, Richard L. Horwitz and Thomas R. Pulsifer of Potter, Anderson & Corroon, Wilmington, Del., for defendants.

MEMORANDUM OPINION

LATCHUM, Senior District Judge.

I. INTRODUCTION

The genesis of this action is a complaint filed by the United States of America ("the Government") alleging that the Internal Revenue Service ("IRS") erroneously issued income tax refund checks for the years 1982 and 1983 to McDonald & Eide, Inc. ("M & E"), in care of Frank A. Gunnip ("Gunnip"), Receiver for M & E.¹ (Docket Item "D.I." 1.) In response to the complaint, Gunnip filed an answer and counterclaim. The answer denied that the refund checks were erroneously issued and the counterclaim alleged that Gunnip, as the Receiver for M & E, is entitled to refunds of all corporate income taxes and interest paid on behalf of M & E for the years 1979, 1980, and 1981, plus statutory interest. (D.I. 5.)

The parties have filed cross-motions for summary judgment. (See D.I. 15; 19.) The parties do not dispute any material issues of fact and agree that the Court needs only to resolve the legal issue of whether Section 6012 of the Internal Revenue Code ("the Code"), 26 U.S.C. § 6012 (1980), and the Regulations promulgated thereunder require Gunnip to file corporate income tax returns and pay Federal taxes on behalf of M & E for the years 1979 to 1983. For the reasons discussed below, the Court holds that the refunds were not issued erroneously and that Gunnip is entitled to refunds for 1979, 1980, and 1981. Therefore, the Court will grant Gunnip's motion for summary judgment and will deny the Government's motion for summary judgment.

II. FACTS

A. Background of McDonald & Eide, Inc.

McDonald & Eide, Inc., was incorporated under the laws of Delaware on October 16, 1953. (D.I. 16 Affidavit of Frank A. Gunnip at ¶ 1.) M & E engaged in the oil and gas exploration business in Montana from late 1953 until early 1955. (Id.) In 1954 M & E devoted nearly all its capital to a single well which proved to be dry in early 1955. Shortly thereafter, M & E ceased all operations. (Id.) On January 22, 1958, the Governor of Delaware repealed M & E's charter for failure to pay franchise taxes. (Id. at ¶ 2.) M & E shareholders were notified that the corporation had no assets and for all practical purposes was "defunct." (D.I. 14 Resp. of Dft. Gunnip to Plfs. Req. for Admissions at ¶ 7.)

When M & E's charter was revoked, its only assets were part-interest in various mineral rights and oil and gas leases. (D.I. 16 at ¶ 3.) From January 22, 1958 to June 1, 1961, title to all of M & E's assets was transferred to a group of six former M & E officers and the wife of one of these officers. (Id. at ¶ 4.) Several years later, a group of former shareholders investigated whether an action could be brought against certain former officers and directors of M & E based on possible fraud, embezzlement, or use of former corporate assets for their own use and benefit. (D.I. 14 at ¶ 11.) In February 1965 these shareholders filed suit in the Delaware Court of Chancery. The suit sought the appointment of a receiver. (Id. at ¶ 12.) The request was granted in May 1965 and Frank A. Gunnip was appointed to be the receiver.² (Id. at 13.)

In 1967 Gunnip brought related actions in Montana and Minnesota against certain former M & E officers and shareholders and their transferees. The Minnesota suit sought to compel certain former shareholders to surrender to Gunnip stock for which valuable consideration was not paid. The Montana action was brought to recover mineral rights and lease interests that were allegedly misappropriated by the former officers. (D.I. 16 at ¶ 7.) Judgment was entered in favor of Gunnip in the Montana case in December 1970. (Id. at ¶ 8.) The Minnesota suit was settled in 1972 when the defendants agreed to reduce their holdings in M & E by approximately 100,000 shares. (Id. at ¶ 9.)

Until 1979 the lease interests and mineral rights recovered in the Montana suit appeared to be worthless. Then, in 1979, Gunnip was paid accumulated royalties pursuant to the terms of the leases. Since 1979 Gunnip has continued to collect lease royalty payments and has worked to identify all former M & E shareholders, so the royalty payments, leasehold interests, and mineral rights can be distributed. (Id. at ¶ 10.)

Besides pursuing the Montana and Minnesota suits and seeking to identify former M & E shareholders, Gunnip's activities have been minimal. In 1979 Gunnip instituted a suit to determine the amount he was entitled to receive pursuant to a lease. He filed a second suit in 1985 to quiet title to a leasehold interest. (Id. at 13.) These and Gunnip's other activities, such as executing division orders, obtaining appraisals, and preparing accountings and tax returns, have all been done under the supervision of the Court of Chancery. (Id. at ¶¶ 13, 14.)

B. Tax Dispute

This case is a dispute over corporate income taxes paid by Gunnip on behalf of M & E. In January 1981 Gunnip requested a private letter ruling from the IRS on the question of whether Gunnip needed to file tax returns for the income from lease interests. The IRS ruled that Gunnip was required to file returns and pay corporate income taxes, because M & E was still considered to be in existence for Federal tax purposes and the lease payments were income. (Id. at Exhibit "Ex." G.) Subsequent to the Private Letter Ruling, Gunnip filed Form 1120 Corporation Income Tax Returns for the years 1979 through 1983 and paid the taxes due under protest. (Id. at Exs. I-L.) After the taxes were paid, Gunnip filed amended returns for the five years in question. The amended returns reported that tax was not due in any of the five years, because M & E did not exist for tax purposes during that time and therefore was not a taxable entity. (Id. at Exs. M-Q.) The claims for the 1979, 1980, and 1981 tax years were never acted on by the IRS, but for reasons not apparent to the Government, refund checks for the entire amount of taxes paid in 1982 and 1983 were generated and transmitted to Gunnip. The Government's claim seeks to recover the proceeds of these "erroneously" issued refund checks, whereas in the counterclaim, Gunnip seeks a refund of the taxes paid for 1979, 1980, and 1981.

III. ANALYSIS

If Gunnip is obligated to file returns and pay taxes on behalf of M & E, this obligation is imposed by Section 6012(b)(3) of the Code which states:

In a case where a receiver, trustee in bankruptcy, or assignee, by order of a court of competent jurisdiction, by operation of law or otherwise, has possession of or holds title to all or substantially all the property or business of a corporation, whether or not such property or business is being operated, such receiver, trustee, or assignee shall make the return of income for such corporation in the same manner and form as corporations are required to make such returns.

The Government contends this provision clearly requires that Gunnip file tax returns and pay the taxes due. Gunnip argues that the Government cannot require him to file returns and pay taxes, because Section 6012 only imposes such requirements on a receiver in situations where the corporation by itself would have to file returns and pay taxes. Gunnip asserts that this is not one of these situations, because M & E did not exist as a corporation during any of the years in question.

Two regulations promulgated under Section 6012 are relevant to this case. One is Treas.Reg. § 1.6012-3(b)(4) which is essentially a restatement of Section 6012.³ The other is Treas.Reg. § 1.6012-2(a)(2) which states in part:

A corporation in existence during any portion of a taxable year is required to make a return.... A corporation is not in existence after it ceases business and dissolves, retaining no assets, whether or not under State law it may thereafter be treated as continuing as a corporation for certain limited purposes connected with winding up its affairs, such as for the purpose of suing and being sued. If the corporation has valuable claims for which it will bring suit during this period, it has retained assets and therefore continues in existence. A corporation does not go out of existence if it is turned over to receivers or trustees who continue to operate it.

(Emphasis added.) The Government posits that Section 6012 and Reg. § 1.6012-3(b)(4) clearly establish that Gunnip had to file returns and pay taxes for the years in question, regardless of the fact that Gunnip did not operate the business. (See D.I. 20 at 7-9.) Gunnip bases his argument and interpretation of Section 6012 on Reg. § 1.6012-2(a)(2). Gunnip contends this regulation clearly establishes that a corporation which no longer exists does not have to file returns or pay corporate income tax.

This Court's opinion is that the critical question which must be answered is whether M & E existed during the years in question. Reg. § 1.6012-2(a)(2) clearly makes existence a precondition to taxability. If M & E existed and the other conditions of Section 6012 are met, then Gunnip is not entitled to any refunds and the "erroneous" refunds must be turned over to the Government. As the discussion to follow will indicate, the Court must use what it will term the "Corporate Lifecycle Test" to determine whether M & E existed during the years in question.

To determine whether M & E existed as a...