Frank Sawyer Trust of May 1992 v. Comm'r of Internal Revenue

• Decision Date: 24 August 2009
• Docket Number: No. 5526–07.,5526–07.
• Citation: 133 T.C. 60,133 T.C. No. 3
• Parties: FRANK SAWYER TRUST OF MAY 1992, Transferee, Carol S. Parks, Trustee, Petitioner v. COMMISSIONER of INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

133 T.C. 60

133 T.C. No. 3

FRANK SAWYER TRUST OF MAY 1992, Transferee, Carol S. Parks, Trustee, Petitioner

v.COMMISSIONER of INTERNAL REVENUE, Respondent.

No. 5526–07.

United States Tax Court.

Aug. 24, 2009.

P owned the stock of four corporations: TT, CT, St. Botolph, and Sixty–Five Bedford. The four corporations held assets with high fair market values and low adjusted bases. During 2000 and 2001 the corporations sold their assets, leaving the corporations with large cash reserves and facing large contingent tax liabilities.

Shortly after the respective asset sales, P sold its stock in the corporations to F. F, after purchasing the stock, transferred assets with inflated bases to the corporations . The corporations then sold these assets, generating losses. The losses were used to offset the corporations' large capital gains. As a result of the claimed losses, the corporations did not pay tax on the asset sales. Later F stripped the proceeds of the asset sales from the corporations.

R issued notices of deficiency to P, determining deficiencies in P's fiduciary income tax on account of the sale of the corporations' stock and imposing sec. 6662, I.R.C., accuracy-related penalties. P petitioned this Court, and P and R entered into decision documents finding that there were no deficiencies in tax and that P was not liable for sec. 6662, I.R.C., accuracy-related penalties. These decision documents were the result of a stipulated decision between the parties and not a trial on the merits.

R later examined the corporations' tax returns. R and the corporations entered into closing agreements which disallowed the claimed losses and imposed sec. 6662, I.R.C., accuracy-related penalties on the underpayments of tax. The corporations, having been stripped of the proceeds of the asset sales, lacked the funds necessary to pay the assessed tax.

R issued notices of transferee liability to P attempting to collect the corporations' unpaid tax liabilities from their former shareholder. P petitioned this Court and has filed a motion for summary judgment arguing that: (1) Res judicata bars the instant transferee liability action; and (2) in the alternative R is collaterally estopped from arguing in this transferee liability action that there were deemed liquidating distributions from the corporations to P.

Held: Res judicata does not bar the instant action because the cause of action in the earlier deficiency cases is not the same as the cause of action in the instant transferee liability action.

Held, further, R is not collaterally estopped from arguing in this proceeding that there were deemed liquidating distributions because the decision documents entered into by P and R to resolve the deficiency cases do not indicate that the parties intended to resolve the questions whether there were deemed liquidating distributions from the corporations to P and the deficiency cases dealt with deficiencies in P's fiduciary income tax, while the instant action deals with P's liability as a transferee of the corporations.

David R. Andelman and Juliette Galacia Pico, for petitioner.

Kevin G. Croke, for respondent.

OPINION

GOEKE, Judge.

This case is before the Court on the trust's motion for summary judgment filed pursuant to Rule 121.¹ Respondent has asserted transferee liability against the trust. The trust argues in its motion papers that the doctrines of res judicata and collateral estoppel bar this transferee liability action. The trust argues that the issue of whether the trust is liable for the unpaid tax liabilities at issue was decided in a prior deficiency action after respondent issued notices of deficiency to the trust. The parties agree that there are no material facts in dispute. For the reasons stated herein, we will deny the trust's motion.

Background

The trust has a mailing address in Boston, Massachusetts. Respondent issued notices of transferee liability asserting that the trust is liable as transferee for the unpaid income tax liabilities of four corporations: (1) TDGH, Inc. (Town Taxi); (2) CDGH, Inc. (Checker Taxi); (3) St. Botolph Holding Co. (St.Botolph); and (4) Sixty–Five Bedford Street, Inc. (Sixty–Five Bedford) (collectively, the corporations).

Two types of transactions occurred during the 2000 and 2001 tax years. First, the corporations sold substantially all of their assets to unrelated third parties. The asset sales were followed by the trust's sale of its stock in the corporations to a different unrelated third party.² The trust owned all of the stock of the corporations before 2000.

A. Asset Sales

Town Taxi and Checker Taxi provided taxicab services in Massachusetts. The two companies' primary assets were taxicab medallions that were required by the State licensing agencies in order to provide taxicab services. St. Botolph and Sixty–Five Bedford owned real estate used in the operation of Town Taxi's and Checker Taxi's taxicab businesses. St. Botolph owned a parking garage, while Sixty–Five Bedford owned two additional parcels of land.

In 2000 Town Taxi and Checker Taxi sold substantially all of their assets to unrelated third-party purchasers. Town Taxi and Checker Taxi recognized gain on the sales and were left with large cash holdings. Unless able to offset those gains with losses, Town Taxi and Checker Taxi would face large contingent tax liabilities. Town Taxi filed a Schedule D, Capital Gains and Losses, with its Form 1120, U.S. Corporation Income Tax Return, showing proceeds of $18,468,900 from the sale of the medallions. Town Taxi claimed a basis of $2,740,000 in the medallions, resulting in gain of $15,728,900. Checker Taxi's Schedule D indicated proceeds of $17,578,000 from its sale of the taxicab medallions. Checker Taxi claimed a basis of zero in its medallions, resulting in gain of $17,578,000 on the sale.

In 2001 St. Botolph and Sixty–Five Bedford sold their respective parcels of real estate to two different section 501(c)(3) educational institutions. Like Town Taxi and Checker Taxi, St. Botolph and Sixty–Five Bedford recognized gain on the sales and were left holding large amounts of cash. St. Botolph's Schedule D showed proceeds from the land sale of $22 million. St. Botolph's claimed a basis of $1,102,509 in the land, resulting in gain of $20,897,491. Sixty–Five Bedford's Schedule D showed proceeds of $1,180,000 from the sale of two properties. Sixty–Five Bedford claimed a basis of $942,000 in these properties. Sixty–Five Bedford also reported on its Schedule D gain of $4,253,474 on its Form 4797, Sales of Business Property. This resulted in total gain of $5,195,474.

B. Stock Sales

A representative of the trust received a promotional letter from Midcoast Credit Corp. (Midcoast) before Town Taxi and Checker Taxi's sales of the taxicab medallions. The promotional letter indicated that Midcoast was interested in acquiring C corporations with significant capital gains. Town Taxi and Checker Taxi were corporations with a potential to realize significant capital gains, and the trust's representatives contacted Midcoast. Because the corporations' potential capital gains were so large, Midcoast brought in Fortrend International, L.L.C. (Fortrend). Fortrend was involved in the stock sales because its business relationships provided it with greater access to capital than Midcoast had. Representatives of the trust met with representatives of Fortrend, and Fortrend indicated that it was looking to purchase the stock of companies that had liquidated or were in the process of liquidating all their assets and had incurred or would incur large capital gains tax liabilities as a result. Fortrend indicated that it would pay a purchase price for the stock of such a company equal to the value of the cash and other assets less 50 percent of the amount of the income tax liability. The trust decided to sell the corporations' stock to Fortrend, and the sales were consummated in 2000 and 2001.

1. Taxi Companies

The trust and Fortrend agreed that the total purchase price for the stock of Town Taxi and Checker Taxi would be the amount the trust would have received if Town Taxi and Checker Taxi had sold their assets, paid their tax liabilities, and distributed the remaining cash to the trust, plus 50 percent of the taxes which Town Taxi and Checker Taxi would ordinarily have to pay.³

The trust entered into stock purchase agreements dated August 7, 2000, with Fortrend under which the trust agreed to sell to Fortrend the stock of Town Taxi and Checker Taxi.⁴ The stock purchase agreements provide a formula for the calculation of the purchase price: the purchase price would be equal to the value of Town Taxi's and Checker Taxi's assets less 50 percent of the “specified remaining tax liability” of each. The specified remaining tax liabilities were the Federal and State tax liabilities arising from the sale of each corporation's assets. The purchase price for the stock of Town Taxi was $14,850,701. The purchase price for the stock of Checker Taxi was $17,880,694.

2. Land Companies

As discussed above, St. Botolph and Sixty–Five Bedford owned parcels of land. The trustee of the trust decided after the taxicab medallions were sold in 2000 to sell these parcels of land. After the land sales were completed, St. Botolph and Sixty–Five Bedford were in the same position that Town Taxi and Checker Taxi had just been in—holding large amounts of cash and facing large capital gains tax liabilities. Representatives of the trust contacted Midcoast to determine whether Midcoast was interested in purchasing the stock of St. Botolph and Sixty–Five Bedford. Midcoast was interested and again involved Fortrend.

The formula used to determine the total purchase price was similar to the one used to calculate the purchase price of the Town Taxi and Checker Taxi stock—the value of St. Botolph's and Sixty–Five Bedford's assets minus a percentage of their specified remaining tax liabilities. The only difference was the applicable...