Feldman v. Comm'r of Internal Revenue
| Decision Date | 27 December 2011 |
| Docket Number | Docket No. 27387-08,Docket No. 27388-08,Docket No. 27386-08,Docket No. 27389-08,Docket No. 27392-08,Docket No. 26737-08,Docket No. 27391-08,Docket No. 27390-08,Docket No. 27393-08 |
| Parties | RAY FELDMAN, TRANSFEREE,ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
Robert Edward Dallman, for petitioners.
George W. Bezold, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: In these consolidated cases respondent determined transferee liability against petitioners relating to an agreed and unpaid $593,979 Federal income tax liability of Woodside Ranch Resort, Inc. (Woodside Ranch), for 2002, plus an addition to tax, penalties, and interest relating to Woodside Ranch's unpaid 2002 Federal income tax liability. The amount of each petitioner's respective transferee liability as calculated by respondent is as follows: Ray Feldman--$542,514; Sharon L. Coklan--$117,013; Jill K. Reynolds--$42,550; Jan Reynolds--$212,751; Carrie Donahue--$95,738; Rhea Dugan--$41,274; Emma McClintock--$95,738; Robert Donahue--$21,275; and Richard Feldmann--$309,765.
The transferee liability determined against each petitioner is based largely on respondent's conclusion that a purported July 18, 2002, sale2 by petitioners of shares of stock in Woodside Ranch constituted a sham transaction not dissimilar from the abusive tax-avoidance transaction described in Notice 2001-16, 2001-1 C.B. 730 ().
The issue for decision is whether petitioners are liable under section 6901 as transferees for their respective shares of Woodside Ranch's $593,979 Federal income tax liability for 2002, plus the addition to tax, penalties, and interest.3
Many of the facts have been stipulated and are so found.
At the time of filing their separate petitions, petitioners resided in Wisconsin, Florida, and Arizona. Trial was held on November 17, 2010, in Milwaukee, Wisconsin.
In the 1920s Woodside Ranch was established and began business as a Wisconsin corporation with its place of business in Mauston, Wisconsin.
From its incorporation until May of 2002 Woodside Ranch owned and operated a dude ranch resort offering, among other activities, horseback riding, swimming, boating, hiking, fishing, snow skiing, and snowmobiling, along with accommodations.
The historic shareholders in Woodside Ranch were William Feldman and his five children. In 2002, at the time of the transactions before us, Woodside Ranch stock was owned by 10 shareholders, 9 of whom were grandchildren or great-grandchildren of William Feldman. They are petitioners herein. The 10thshareholder, Lucille Nichols, daughter of William Feldman, has died, and her estate is not involved in these consolidated cases.
Just before the 2002 transactions involved in these cases, the officers of Woodside Ranch were: President--decedent Lucille Nichols; vice president--Richard Feldmann; secretary--Ray Feldman; and treasurer--Carrie Donahue. These same individuals also were the directors of Woodside Ranch.
On average, each year 6 to 20 accidents resulting in injuries to customers occurred at Woodside Ranch. Only a few of these accidents resulted in formal claims against Woodside Ranch. The injuries that occurred at Woodside Ranch typically were not serious, and personal injury claims were satisfied by Woodside Ranch with in-kind compensation (e.g., free return visits to the ranch for the injured customers and their families) plus the payment by Woodside Ranch of medical expenses. After the transactions described below that occurred in the spring and summer of 2002, only one personal injury claim against Woodside Ranch resulted in a payment to an injured customer. That payment was for $50,000.
Although the sporting and other activities at Woodside Ranch involved some risk of personal injury for Woodside Ranch customers, over the years Woodside Ranch did not obtain comprehensive personal injury insurance covering potential injuries. Such comprehensive insurance was available butexpensive, and management of Woodside Ranch chose not to purchase it. Woodside Ranch did carry several insurance policies that covered some activities at the ranch.4 As stated, for many years including 2002 Woodside Ranch management was unwilling to pay the high cost of comprehensive liability insurance covering participant sports activities.
In the late 1990s and early 2000s the owners and management of Woodside Ranch faced significant challenges to the continued operation of the ranch: Increased competition from Wisconsin casinos and water parks; aging of the Woodside Ranch shareholders and directors; and lack of interest on the part of the shareholders and the Feldman next generation in continued operation of the ranch. As a result, the shareholders of Woodside Ranch began a search for a buyer of either their stock in Woodside Ranch or of the assets of Woodside Ranch.
The shareholders were interested in minimizing the tax liabilities associated with a sale of their interests in Woodside Ranch. A corporate asset sale would trigger significant Federal and State corporate income tax liabilities.5
In the fall of 2001 negotiations began with an individual named Damon Zumwalt (Zumwalt) for the sale of Woodside Ranch, with the expectation on both sides that commercial operation of the dude ranch would be continued by Zumwalt. A stock sale was proposed to Zumwalt, who "just laughed and chuckled and said, 'not on your life, it's got to be an asset sale'."
On May 17, 2002, after several months of negotiations, the operating assets and business of Woodside Ranch were sold to Woodside Ranch, LLC (WRLLC), for $2.6 million in cash (hereinafter often referred to as the asset sale or the Zumwalt asset sale). Zumwalt was the sole owner and sole member of WRLLC. On this asset sale, the net cash proceeds received by Woodside Ranch were $2,301,089.
In a June 5, 2002, memorandum to the Woodside Ranch shareholders, petitioner Ray Feldman referred to the above estimated taxes as posing a "dilemma" for the shareholders. Also, Woodside Ranch management and shareholders were aware that under Wisconsin law they might be able to limit their individual liability relating to potential personal injury claims of customers arising from ranch activities if the sale of Woodside Ranch took the form of a stock sale with the new owners of theWoodside Ranch stock assuming the liabilities of Woodside Ranch, including risks relating to potential personal injury claims.6
The total combined Federal and State income tax liability that Woodside Ranch incurred on the asset sale was approximately $750,000, of which the officers, directors, and shareholders of Woodside Ranch at all relevant times were aware.
After the asset sale to Zumwalt, Woodside Ranch had no operating assets and ceased to engage in any meaningful business activity.
In the early spring of 2002 Fred Farris (Farris), an accountant and financial adviser to Woodside Ranch and to some of the individual shareholders, introduced the Woodside Ranch officers, directors, and shareholders to MidCoast Credit Corp. and to MidCoast Acquisition Corp. (collectively MidCoast). MidCoast was owned directly or indirectly 50 percent by Michael Bernstein and 50 percent by Honora Shapiro.
Representatives of MidCoast claimed to have expertise in tax matters and provided to the Woodside Ranch officers promotional materials which outlined a potential tax-avoidance transaction as an alternative to a liquidation of Woodside Ranch.
Under the transaction presented by the MidCoast representatives, the shareholders of Woodside Ranch allegedly would be relieved of a significant portion, if not all, of Woodside Ranch's combined Federal and State income tax liability of approximately $750,000 relating to the Zumwalt asset sale.
On June 11, 2002, in spite of the MidCoast promotional materials that had been received, the Woodside Ranch finance committee, consisting of petitioners Carrie Donahue, Ray Feldman and Richard Feldmann, met and adopted a resolution recommending that a plan of liquidation for Woodside Ranch be adopted.
However, the Woodside Ranch board of directors did not adopt the recommended plan of liquidation, and the Woodside Ranch directors chose instead to pursue the alternative tax-avoidance transaction proposed by MidCoast mentioned above and described more specifically below.
As reflected in written notations of petitioner Ray Feldman of a meeting that apparently occurred later in the day on June 11, 2002, the MidCoast representatives explained that under the MidCoast proposal MidCoast would purchase bad debts from entities unrelated to target corporations (such as Woodside Ranch) and would use the bad debts to offset or eliminate unpaid tax liabilities of the newly acquired target corporations. The MidCoast representatives explained that the "Income comes in taxfree by using NOL", and "So * * * [you] create * * * [a] loss--lower deferred tax liability". (Emphasis added.)
On June 17, 2002, MidCoast representatives explained over the phone to Woodside Ranch officers that if Woodside Ranch was not liquidated and if the cash Woodside Ranch received on the Zumwalt asset sale was not distributed directly to the shareholders, but instead the shareholders agreed to sell to MidCoast their Woodside Ranch stock, MidCoast would pay to the MidCoast shareholders a "'premium' of approximately $200,000 to 250,000" for their stock (hereinafter sometimes referred to as the MidCoast premium).
The MidCoast premium that the Woodside Ranch shareholders would receive was to be calculated as a percentage (between 25 and 33 percent) of the approximate combined Federal and State corporate income tax liability Woodside Ranch had incurred as a result of the Zumwalt asset sale. Notations reflecting the MidCoast representations explain: "The...
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