Furman v. United States

Decision Date27 July 1984
Docket NumberCiv. A. No. 83-1249-3.
PartiesAlester G., III and Mary O. FURMAN; William M. and Mary F. McGinty; Jackson H. and Beverly C. Brown; William C. and Helen M. Williams; and Frank S. and Rosalie H. Poe, Plaintiffs, v. UNITED STATES of America, Defendant.
CourtU.S. District Court — District of South Carolina

Merline, Thomas & Stuart, P.A. by David A. Merline, Rainey, Britton, Gibbes & Clarkson by Frank H. Gibbes, III, Greenville, S.C., for plaintiffs.

Department of Justice by Mark Muedeking, Tax Div., Washington, D.C., for defendant.

MEMORANDUM ORDER

GEORGE ROSS ANDERSON, Jr., District Judge.

This is a tax refund suit wherein several taxpayers seek refunds of taxes and interest paid for the year 1978, plus statutory interest thereon. Each of the taxpayers filed timely joint U.S. Individual Income Tax Returns for 1978 showing liability on those returns as follows:

                                                                      TAX LIABILITY PER
                             TAXPAYERS                                 ORIGINAL RETURN
                      Alester G. Furman, III and
                      Mary O. Furman                                      $171,740.67
                      William M. McGinty and
                      Mary F. McGinty                                      $82,963.00
                      Jackson H. Brown and
                      Beverly C. Brown                                     $90,893.00
                      William C. Williams and
                      Helen M. Williams                                    $92,948.00
                      Frank S. Poe and
                      Rosalie H. Poe                                       $83,447.00
                

After audit of each of the returns listed above by the Commissioner of Internal Revenue (hereinafter the "Commissioner"), deficiencies were timely proposed and assessments were timely made as follows:

                           TAXPAYERS                ASSESSMENTS          ASSESSMENT DATE
                       Alester G. Furman, III       $17,839.33 (T)           7/19/82
                       Mary O. Furman                 5,420.46 (I)           7/19/82
                       William M. McGinty           $12,281.00 (T)           7/19/82
                       Mary F. McGinty                3,731.58 (I)           7/19/82
                       Jackson H. Brown             $16,811.00 (T)           7/26/82
                       Beverly C. Brown               5,108.01 (I)           7/26/82
                       William C. Williams          $17,036.00 (T)           7/19/82
                       Helen M. Williams              5,176.38 (I)           7/19/82
                
                       Frank S. Poe                  $6,842.00 (T)           7/19/82
                       Rosalie H. Poe                 2,078.94 (I)           7/19/82
                       (T) Tax Assessed
                       (I) Interest Assessed
                

The plaintiffs paid these amounts and filed their first claims for refund (Forms 1040X) in March, 1982, requesting refunds of tax and assessed interest, plus statutory interest, as follows:

                                                CLAIMS FOR REFUND
                                                                ASSESSED
                       TAXPAYERS                    TAX         INTEREST       TOTAL
                       Alester G. Furman
                       III and Mary O
                       Furman                    $34,653.00     $5,420.00     $40,073.00*
                       William M. McGinty
                       and Mary F. McGinty       $39,608.00     $3,731.58     $43,339.58*
                       Jackson H. Brown and
                       Beverly C. Brown          $44,384.00     $5,108.00     $49,492.00*
                       William C. Williams
                       and Helen M. Williams     $44,245.00     $5,176.00     $49,421.00*
                       Frank S. Poe and
                       Rosalie H. Poe            $28,921.00     $2,078.94     $30,999.94*
                

The Commissioner disallowed the plaintiffs' first claims for refund on May 23, 1983, by letter sent certified mail. Thereafter, the plaintiffs timely filed this action on May 25, 1983. Pursuant to leave granted by this Court, the plaintiffs each filed timely second claims for refund in December, 1983 for the same amounts listed above. These second claims for refund, which put forth new theories for recovery, have also been disallowed by the Commissioner. Jurisdiction and venue are, therefore, proper.

The defendant, United States of America, moved for summary judgment. The plaintiffs thereafter filed a cross-motion for summary judgment. The Court concludes that the defendant's motion should be granted and that the plaintiffs' cross-motion must be denied.

The relevant facts with respect to the plaintiffs' claims involve non-compete agreements entered into by the male plaintiffs on January 4, 1977. (The female plaintiffs are parties to this action only by virtue of having filed joint income tax returns, and therefore, all references to the plaintiffs will be references to the male plaintiffs.) The plaintiffs were all stockholders and employees of The Furman Agency, Inc., during 1976. The Furman Agency, Inc. (hereinafter "The Furman Agency") was a South Carolina corporation engaged in the sale of insurance. Its headquarters and principal place of business was Greenville, South Carolina.

NEGOTIATIONS

Beginning in February of 1976 the plaintiffs, as stockholders and members of the Board of Directors of The Furman Agency, began negotiations with Marsh & McLennan, Inc., a major subsidiary of Marsh & McLennan Companies, Inc., and a major multi-national insurance broker, for sale of The Furman Agency. Several proposals for the form of the sale or merger were discussed internally by the plaintiffs and proposed to Marsh & McLennan, Inc. (hereinafter "Marsh & McLennan"). The original proposal was for an exchange of all 66,400 outstanding shares of Furman Agency stock for 86,500 shares of unregistered shares of Marsh & McLennan stock. These shares of Marsh & McLennan stock were to be held for investment due to federal securities laws. This form was favored by plaintiffs Furman and Poe. However, this proposal was rejected because of possible unfavorable tax treatment for profits realized by the other three plaintiffs. These plaintiffs expressed concern that the profit on their stock would be taxed as income immediately upon transfer of the shares. Therefore, these plaintiffs countered with a proposal for a sale of stock for cash rather than for stock. These plaintiffs were worried about receiving enough cash to pay any taxes due on the sale or merger. On the basis of the above-described conflicts of interest, the plaintiffs agreed that they would individually continue negotiations with Marsh & McLennan and also consider other alternatives.

At a special meeting of the Board of Directors of The Furman Agency the plaintiffs again reviewed the status of their individual negotiations with Marsh & McLennan for the sale of their stock. A summary of this review as found in the minutes of the meeting showed that the individual plaintiffs had established tentative price agreements with Marsh & McLennan for the sale of their Furman Agency stock for cash at the following prices:

                                                                PURCHASE PRICE
                       TAXPAYER       NUMBER OF SHARES            FOR SHARES
                       Furman              32,000                $1,738,800.00
                       McGinty              4,200                  $365,300.00
                       Brown                4,000                  $366,800.00
                       Williams             3,000                  $329,000.00
                       Poe                 18,000                  $954,300.00
                

After this discussion of the sale of stock to Marsh & McLennan, the minutes of the special meeting show that the plaintiffs then took up a separate discussion of their negotiations with Marsh & McLennan concerning non-compete agreements. The minutes recorded during this discussion showed that there were substantial actual negotiations over the terms of the non-compete agreements as well as the consideration to be received for execution of these agreements. The recorded minutes showed that the negotiations for the non-compete agreements were separate and distinct from the negotiations for the sale of stock.

Based on these negotiations, each of the plaintiffs entered into two separate contracts with Marsh & McLennan. The first was an Agreement for Purchase of Stock, the second was an employment and non-compete contract.

THE AGREEMENTS FOR PURCHASE OF STOCK

On November 17, 1976, each of the plaintiffs entered into an Agreement for Purchase of Stock with Marsh & McLennan. Plaintiffs McGinty, Brown and Williams each entered into separate, individual sales agreements. On the same date, Furman entered into two separate agreements for the sale of his stock. The first was an individual agreement with Marsh & McLennan for the sale of 2,697 shares of Furman Agency stock. Furman's second sales agreement was entered into along with Poe. Under this agreement, plaintiffs Furman and Poe agreed to sell all of Poe's stock (18,000 shares) and all of Furman's remaining shares of Furman Agency stock (29,303 shares) to Marsh & McLennan.1

Pursuant to these November 17, 1976 stock sales agreements the plaintiffs each sold their shares in The Furman Agency according to the following basic terms:

                                     TOTAL                                  TOTAL
                                   NUMBER OF                                SALES
                   PLAINTIFF      SHARES SOLD       PAYMENT TERMS           PRICE
                   Furman            32,000        1977 - $1,304,099      $1,738,8002
                                                   1979 -    434,701
                   McGinty            4,200        1977 -   $273,975       $365,300
                                                   1979 -     91,325
                   Brown              4,000        1977 -   $275,100       $366,800
                                                   1979 -     91,700
                   Williams           3,000        1977 -   $246,750       $329,000
                                                   1979 -     82,250
                   Poe               18,000        1977 -   $715,725       $954,300
                                                   1979 -    238,575
                

These amounts actually received by the plaintiffs for the sale of their Furman Agency stock are the same as amounts negotiated for the sale of said stock as reported at the special meeting of the Board of Directors. The Agreements for Purchase of...

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