Capshaw v. Schieck

• Decision Date: 10 April 2002
• Docket Number: No. 01-35.,01-35.
• Citation: 44 P.3d 47,2002 WY 54
• Parties: Gloria J. CAPSHAW and Judy G. Capshaw, a/k/a JUDY G. Roesler, Appellants (Defendants), v. E. Tim SCHIECK; Diane E. Schieck; John D. Kerns; Allyson A. Kerns; and Rocky Mountain Cementers, Inc., Appellees (Plaintiffs).
• Court: Wyoming Supreme Court

44 P.3d 47

2002 WY 54

Gloria J. CAPSHAW and Judy G. Capshaw, a/k/a JUDY G. Roesler, Appellants (Defendants), v. E. Tim SCHIECK; Diane E. Schieck; John D. Kerns; Allyson A. Kerns; and Rocky Mountain Cementers, Inc., Appellees (Plaintiffs).

No. 01-35.

Supreme Court of Wyoming.

April 10, 2002.

Georg Jensen of the Law Offices of Georg Jensen, Cheyenne, WY, Representing Appellants.

David A. Drell of Vlastos, Brooks, Henley & Drell, P.C., Casper, WY, Representing Appellees.

Before LEHMAN, C.J., and GOLDEN, HILL, KITE, and VOIGT, JJ. VOIGT, Justice.

[¶ 1] Gloria J. Capshaw and Judy G. Capshaw (the sellers) sold all of the shares in Rocky Mountain Cementers, Inc. (the corporation), a Wyoming corporation, to E. Tim Schieck, Diane E. Schieck, John D. Kerns, and Allyson A. Kerns (the buyers) on March 2, 1996. The buyers chose to purchase the corporation, rather than its assets, based on the corporation's July 31, 1994, tax return that showed a net operating loss (NOL) carry forward of $203,614.00.¹ The Internal Revenue Service (IRS) audited the corporation in 1998 for the 1994-1995 tax year. Based on this audit, the IRS disallowed certain deductions, which reduced the NOL carry forward.² The buyers requested indemnification from the sellers under the indemnification clause of the Stock Purchase Agreement for any damages resulting from the NOL carry forward reduction. When the sellers refused to indemnify the buyers, this lawsuit followed. The trial court conducted a trial in May 2000, and awarded the buyers judgment against the sellers in the amount of $32,160.75. The sellers appealed. We affirm, but remand for entry of a judgment consistent herewith.

ISSUES

[¶ 2] We will address the issues as they have been stated by the sellers as appellants:

1. May the court allow testimony regarding future profits without foundation, based on conjecture and speculation over the objection of the appellants for lack of foundation and best evidence?

2. May the court award a judgment for damages against the defendants based in part on losses claimed due to the filing of an incorrect or fraudulent tax return by the plaintiffs?

3. May the court award judgment for future damages for loss of future tax benefits when the plaintiff[s] put on no evidence regarding the amount of any future taxable income?

FACTS

[¶ 3] The buyers entered into a Stock Purchase Agreement with the sellers on February 20, 1996. Closing occurred on March 2, 1996, at which time the stock certificates were transferred to the buyers. The sellers sold all their stock in the corporation to the buyers for $250,000.00. Prior to the sale, the buyers inspected the corporation's financial records. The corporation's July 31, 1994, tax return reflected a NOL carry forward of $203,614.00. When the sellers confirmed that the corporation had the NOL carry forward, the buyers chose to purchase the corporation rather than its assets.

[¶ 4] The Stock Purchase Agreement provided, among other things:

1. PURCHASE PRICE.

The total purchase price for the sale and purchase of the stock and outstanding interests of Sellers in Rocky Mountain shall be Two Hundred Fifty Thousand Dollars ($250,000). The parties agree that this purchase price is tied to the financial condition of Rock Mountain as of January 31, 1996 as reflected by the financial records as of that date....

* * *

5. REPRESENTATIONS AND WARRANTIES.

Sellers represent and warrant as follows:

* * *

D. All books and records of the corporation have been supplied to the Purchasers for the purpose of entering into this transaction and said books and records are true and accurate. The financial statements which have been provided to Purchasers are true and accurate and fairly represent the financial condition and operation of the corporation.. .

* * *

6. INDEMNITY.

Sellers shall indemnify the Purchasers and hold Purchasers harmless from and against any loss or damage occasioned by any act of the corporation, its officers, directors and stockholders, including attorney's fees and costs related to the same prior to March 1, 1996.

[¶ 5] In 1997, the IRS audited the corporation. It determined that improper classifications of payments had been made by the sellers prior to the February 20, 1996, Stock Purchase Agreement, and additional tax, interest, and penalties were owed that amounted to $7,713.66. The buyers paid this amount, and requested indemnification from the sellers. The sellers made full payment to the buyers on November 5, 1997.

[¶ 6] In April 1998, the IRS informed the buyers that it was conducting another audit of the corporation. As a result of the audit, the IRS disallowed many of the deductions made in the corporation's July 31, 1994, tax return, which disallowance reduced the NOL carry forward. The corporation's accountant testified at the trial that the deductions were disallowed because there were no supporting documents in the corporation's financial records to justify them.

[¶ 7] On April 21, 1998, the buyers requested that the sellers reimburse them for any damages sustained as a result of the NOL carry forward reduction. The sellers refused, and the buyers initiated this lawsuit on March 23, 1999. The buyers' Motion for Summary Judgment was heard at a final pretrial conference on May 19, 2000. The trial court found no genuine issue of material fact on the issue of indemnification, and granted partial summary judgment in favor of the buyers, finding the sellers liable for their breach of the agreement for indemnification of the tax loss. The trial court found genuine issues of material fact remained regarding the amount of damages due to the buyers, the buyers' duty to mitigate damages, and the sellers' counterclaims.

[¶ 8] The trial court conducted a trial on damages on May 30 and 31, 2000. A Final Order and Judgment filed October 9, 2000, granted the buyers judgment against the sellers in the amount of $32,160.75. The sellers appealed the Final Order and Judgment.

THE EVIDENTIARY RECORD

[¶ 9] The damages trial was not reported, so no transcript is available. Instead, the parties have, pursuant to W.R.A.P. 3.03, submitted a Statement of Proceedings. Because the nature and extent of the trial evidence is fundamental to this appeal, we will quote nearly verbatim the relevant portions of the Statement of Proceedings:

5. That Neal M. Johnson, CPA, the Plaintiff Rocky Mountain Cementers, Inc.'s accountant, testified that the Internal Revenue Service disallowed the following deductions from the Corporation's Form 1120 for the tax year ending July 31, 1995.

Amount Disallowed Officers' Compensation $ 9,600.00 Repairs and maintenance $ 3,587.00 Bad debt reduction $ 22,794.00 Interest expense $ 15,000.00 Depreciation expense $ 21,595.00 Utility expense $ 6,000.00 Costs of goods sold $ 84,592.00 Non-employee compensation $ 9,500.00 Wages $(12,035.00) _____________ Total Adjustment: $ 160,633.00

Mr. Johnson testified that the basis for the disallowance of such deductions was the lack of any supporting documents for such deductions in the Corporation's financial records.

6. Neal Johnson, CPA testified that Rocky Mountain Cementers, Inc.'s 1996 tax return for the year ending July 31, 1997 reflected profit income of $88,346. That as the Corporation's accountant, he utilized $88,346 of the net operating loss carry forward to offset said income. Mr. Johnson testified that the 1997 tax return for the Corporation for the year ending July 31, 1998 reflected income of $176,692 of which he was only able [to] utilize $5,702 of net operating loss deduction due to the adjustments made by the Internal Revenue Service.

7. That the Plaintiffs' expert, Richard Shamley, CPA, testified that the reduction of the loss carry forward resulted in a tax loss of $50,086. This testimony was based upon the manner in which the Plaintiff Rocky Mountain Cementers, Inc.'s prior accountant, Neal Johnson, CPA, had prepared the July 31, 1997 and July 31, 1998 tax returns.... In cross-examination, Mr. Shamley admitted that he would not have prepared the returns in the same manner and that he would have prepared the returns in accordance with the restrictions under IRC § 382 (26 U.S.C.S. 382) and he knew of no way in this case that the requirements of § 382 could be avoided. Mr. Shamley further testified that in reviewing the tax returns of the Corporation, that such returns showed that Rocky Mountain Cementers, Inc. had shown a profit three out of four years since the Stock Purchase Agreement. That the year the Corporation did show a loss, there was considerable equipment purchased. That based on the past profits, he would anticipate future profits for the Corporation wherein a net operating loss carry forward could be utilized.

[8.] That E. Tim Schieck and John D. Kerns, the president and vice president of Rocky Mountain Cementers, Inc., respectively testified that they fully expected the Corporation to make a profit in the future. That both testified for the current year, the Corporation had a net profit of approximately $110,000. As a result, both testified that they believed that the Corporation had been damaged to the extent of approximately $50,000. This testimony was allowed over the defendants['] objections as to foundation. On cross examination Mr. [Schieck] admitted that the company had filed an amended tax return in conjunction with the July 31, 1999 tax return, which reflected an operating loss of $67,329.00.... The subsequent admission of trial exhibit E, reflected an actual tax refund of $26,259.00.

9. That both expert witnesses, Richard Shamley, CPA, and Dennis Howard, CPA, testified that § 382 of the Internal Revenue Code applied to the plaintiff-tax payer in this case. Mr. Howard testified regarding the operative part of the IRC Section which applied to this case and recited the mechanical application of the statute to the facts of this case and testified that applying § 382 of the Internal Revenue Code to the sale

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