Hightower v. Commissioner, Docket No. 8679-04.
| Decision Date | 28 November 2005 |
| Docket Number | Docket No. 8679-04. |
| Parties | Glenn Hightower v. Commissioner. |
| Court | U.S. Tax Court |
Glenn Hightower, pro se;
Catherine Campbell, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in petitioner's Federal individual income tax of $7,535,620 for 2000 and $389,455 for 2001. After respondent's concession,1 the issues for decision are:
1. Whether $41,585,388 petitioner received in 2000 in a corporate stock buyout of his shares in an S corporation and interest credited in 2000 and 2001 to the account in which he deposited the payment is included in petitioner's income for those years. We hold that it is.
2. Whether petitioner is required to include in income for taxable year 2000 a distributive share of the S corporation's 2000 income. We hold that he is.
Unless otherwise indicated, section references are to the Internal Revenue Code as amended in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found. Petitioner resided in Issaquah, Washington, when the petition in this case was filed.
Daniel O'Dowd (O'Dowd), petitioner, and a third individual organized Green Hills Software, Inc. (Green Hills), as a California corporation in 1986. Green Hills became a Delaware corporation in 1986. Green Hills was an S corporation for Federal income tax purposes at all relevant times.
Petitioner and O'Dowd bought the stock of the third individual in 1992. They each owned 30,000,300 shares thereafter. Petitioner was chairman of the board and secretary, and O'Dowd was president and treasurer. Petitioner and O'Dowd were Green Hills' only directors.
Petitioner and O'Dowd entered into a shareholders' agreement in 1992 which provided that any dispute between them would be resolved through binding arbitration. It also provided that either of them could compel a buyout of the stock held by the other at a price determined by a formula.
Relations between O'Dowd and petitioner deteriorated in 1997 and 1998. Petitioner went to Green Hills' headquarters on March 15, 1998. O'Dowd demanded that petitioner leave and threatened to call the police if petitioner refused. On March 25, 1998, O'Dowd notified petitioner that his access to the company was denied, that the locks had been changed, and that his employment and access to the computer system had been terminated.
Petitioner was the record owner of his shares until October 13, 2000. He retained the right to vote his stock and to receive dividends until that date. He received dividends in 1998 and 1999, no dividends in 2000, and a salary of $13,822 in 1998, $51,381 in 1999, and $16,666 in 2000.
In a letter dated June 26, 1998, O'Dowd properly triggered the buy/sell provision of the shareholders' agreement by offering either to sell his shares to petitioner for $47 million or to buy petitioner's shares for $47 million. The letter also stated that O'Dowd had deposited with Green Hills a certified check for $47 million payable to petitioner in conformity with the shareholders' agreement. Petitioner did not want to sell his stock. Instead, he wanted to exercise his right under the shareholder's agreement to buy O'Dowd's stock for the amount O'Dowd had offered for petitioner's stock ($47 million). However, petitioner could not obtain financing. Thus, O'Dowd compelled a buyout of petitioner's stock.
On August 24, 1998, pursuant to the arbitration clause of the shareholders' agreement, petitioner demanded arbitration regarding O'Dowd's buyout. On December 1, 1999, the arbitrator issued a proposed interim award (the December 1999 award) finding that O'Dowd had not acted improperly in his attempt to buy petitioner's shares. The December 1999 award stated that the arbitrator would reassess the award after considering motions for reconsideration and entry of partial final award.
The arbitrator issued a partial final award on March 8, 2000. The arbitrator found that O'Dowd's actions were consistent with the buyout provision of the shareholders' agreement. The award permitted O'Dowd to treat the purchase of petitioner's stock as having occurred on September 24, 1998, 90 days after O'Dowd invoked the buyout provision of the shareholders' agreement. The arbitrator made the following findings: (a) But for petitioner's failure to tender his shares to O'Dowd within 90 days of O'Dowd's deposit of $47 million with Green Hills, his legal or beneficial interest in Green Hills would have terminated on September 24, 1998; (b) O'Dowd has the right but not the obligation to pay or cause Green Hills to pay petitioner for the shares ($47 million) by September 24, 1998; (c) the purchase price shall be reduced by dividends and salary (net after payment of taxes) paid to petitioner for the period after September 24, 1998; and (d) until O'Dowd completes the purchase of petitioner's stock, petitioner shall be paid all dividends in accordance with the shareholders' agreement, which payments shall offset the purchase price for the shares.
The arbitrator issued a corrected partial final award on April 25, 2000, which provides in pertinent part:
The purchase price shall be offset and reduced by all dividends paid to * * * [petitioner] based on Green Hills' earnings for the Third Quarter of 1998 and thereafter until the date of purchase of * * * [petitioner's] share; said offset shall be reduced by the amount of ordinary taxable income of Green Hills (excluding long term capital gains) attributable to * * * [petitioner] for the period September 24, 1998 until the purchase date multiplied by a fraction the numerator of which is .1367 and the denominator of which is .7070.
Petitioner filed a petition in the California Superior Court for the County of Los Angeles (the Superior Court) and a petition for writ of mandate in the Court of Appeal of the State of California for the Second District (the Court of Appeal) in an effort to have the partial final award vacated. Both petitions were denied.
Green Hills hired an accountant to compute the adjusted purchase price pursuant to the corrected partial final award.2 The accountant estimated the adjusted total purchase price for petitioner's shares to be $42,862,230.95 as of October 15, 2000.
On October 13, 2000, O'Dowd delivered checks to petitioner in the amounts of $32,585,388 and $9 million as payment for petitioner's shares in Green Hills. Both checks were dated October 13, 2000. The face and endorsement areas of each check indicated that the check was not valid if presented for payment after October 23, 2000. O'Dowd drafted a receipt for the checks that read in pertinent part: "Receipt of * * * [checks] aggregating $41,585,388 as payment for all of the shares of Glenn Hightower in Green Hills Software, Inc. is hereby acknowledged." Petitioner crossed out the phrase "as payment for all of the shares of Glenn Hightower in Green Hills Software, Inc.", signed the receipt, and deposited the checks in an interest-bearing bank account that petitioner had opened in his own name solely to hold the funds.
In a letter to O'Dowd dated October 13, 2000, petitioner's attorney stated: (a) Petitioner would tender his shares of Green Hills to O'Dowd, as required by the arbitrator's award under protest, and without waiver of any rights or remedies; (b) the shares were to be held in trust; and (c) petitioner was not entitled to the checks. Petitioner delivered his stock to O'Dowd on October 13, 2000. Petitioner did not endorse the shares.
Interest was credited to petitioner's account in the amounts of $469,593.63 in 2000 and $1,513,788.28 in 2001. There were no transactions on the account in 2000 or 2001 other than the crediting of interest and withholding of Federal income tax.
In a letter to petitioner's attorney dated November 21, 2000, O'Dowd's attorney stated that the account into which petitioner had deposited the $41,585,388 was not a trust account. O'Dowd's attorney offered to hold the funds for petitioner in the attorney's trust account. Petitioner did not respond to the offer.
In February 2001, the Court of Appeal denied petitioner's request to stay the arbitration proceedings. Petitioner filed a motion for rehearing with the Court of Appeal, and the motion was denied. Petitioner filed a petition for review in the Supreme Court of California on March 28, 2001. The petition was denied on May 16, 2001.
The arbitrator issued a final award in the arbitration proceedings on August 29, 2001. He found that: (1) O'Dowd's purchase of petitioner's Green Hills stock for $41,585,388 complied with the partial final award and was effective on October 13, 2000; (2) the payment belongs to petitioner without restriction; (3) petitioner's acceptance of the payment on October 13, 2000, terminated his interest in Green Hills; (4) petitioner is entitled to an additional $52,783;3 (5) O'Dowd is entitled to $604,105.30 for attorney's fees, costs, and expenses; and (6) the net amount petitioner owes O'Dowd is $551,322.30.
On December 11, 2001, petitioner petitioned the Superior Court to vacate the arbitration award. On December 21, 2001, the Superior Court entered a judgment confirming and substantially repeating the findings in the arbitrator's final award.
Petitioner appealed the Superior Court's decision. On July 31, 2003, the Court of Appeal filed its opinion rejecting petitioner's appeal and affirming the decision of ...
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