Merriam v. Commissioner
| Decision Date | 06 September 1995 |
| Docket Number | Docket No. 26075-92. |
| Citation | 70 T.C.M. 627 |
| Parties | Dori R. Merriam, Transferee v. Commissioner. |
| Court | U.S. Tax Court |
Ted H. Merriam, Denver, Colo., for the petitioner. John A. Weeda, for the respondent.
Respondent determined that petitioner is liable as transferee of the assets of Napa Investment Corp. (Napa), transferor, in the amount of $1,154,034.56 for unpaid Federal corporate income tax and additions to tax due from Napa's taxable year ending September 30, 1986.
Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the 1986 taxable year, and Rule references are to the Tax Court Rules of Practice and Procedure.
The issues for our decision are: (1) Whether petitioner is a transferee of Napa under section 6901 and Colorado State law and therefore liable for Napa's Federal income tax and additions to tax for Napa's taxable year ended September 30, 1986; (2) whether Napa is liable under section 6655 for an addition to tax for failure to pay estimated tax in the amount of $22,038.05; (3) whether Napa is liable under section 6651(a)(1) for an addition to tax for failure to timely file a corporate income tax return for the fiscal year ending September 30, 1986, the amount of $101,328.08; and (4) whether Napa is liable under section 6651(a)(2) for an addition to tax for failure to pay timely the corporate income tax it reported as due from the fiscal period ending September 30, 1986, in the amount of $50,795.91.
This case was submitted fully stipulated pursuant to Rule 122. The stipulation of facts with attached joint exhibits and the supplemental stipulation of facts are incorporated by this reference, and the facts contained therein are found accordingly.
Petitioner resided in California at the time the petition was filed in this case.
On June 15, 1983, Merriam Investment Corp. (MIC) was incorporated in and under the laws of the State of Colorado. On November 2, 1983, MIC changed its name to Napa Investment Corp. (hereafter both Napa Investment Corp. and Merriam Investment Corp. will be referred to as Napa for simplicity). Napa utilized the cash receipts and disbursements method of accounting. The initial board of directors of Napa consisted of petitioner, her husband, James A. Merriam, and her stepson, Ted H. Merriam, who was also the registered agent of the corporation. James A. Merriam and Ted H. Merriam resigned as directors of Napa on September 1 and July 11, 1983, respectively. Thereafter, petitioner was the president, sole shareholder, and only director of Napa; however, James Merriam, petitioner's husband, made all decisions for petitioner regarding Napa at all times relevant to this case.
In July 1983, Napa created Texas State Video Co. (TSV), a wholly owned subsidiary, which was incorporated in and under the laws of the State of Texas. TSV sold and franchised video tape rental stores. Napa contributed $100,000 to TSV in exchange for 10,000 shares of TSV's common stock. On August 3, 1983, Napa entered into a stock exchange agreement with Hammer Technologies, Inc. (HTI), by which Napa transferred all of its stock in TSV to HTI in exchange for 12 million shares of restricted common stock of HTI. After the exchange, TSV was a wholly owned subsidiary of HTI, and Napa owned 74 percent of HTI. James A. Merriam, petitioner's husband, was at all relevant times the president, chief executive officer, and chairman of the board of HTI.
In October 1983 HTI acquired all of the outstanding common stock of Hammer Computer Systems, Inc. (HCS), in a section 368(a)(1)(B) reorganization with the sole shareholder of HCS, at which time HCS was developing a computer software product. Consequently, by the end of 1983 HTI was a holding company which owned two wholly owned subsidiaries, TSV and HCS, and Napa was the majority owner of HTI, although Napa did not directly own any stock in either TSV or HCS. In September 1984, TSV completed a public stock offering which raised approximately $2 million from the public sale of its stock. In March 1985, HCS completed a public stock offering and also raised about $2 million from the public. In December 1985, HTI completed a public stock offering which raised approximately $2 million of equity capital, and Napa joined in this offering and sold some of its HTI stock.
The primary source of Napa's income was from the sale of HTI stock from which it realized several million dollars in capital gains, specifically $2,835, $586,249, and $4,861,241 for the years ending September 30, 1984, 1985, and 1986, respectively.
Also during its corporate existence Napa lent a total of $1,535,673.12 to petitioner (collectively referred to as Shareholder Loans) of which $1,527,091.12 was lent to petitioner during its final fiscal period ending September 1986.
The Shareholder Loans are summarized as follows:
Prior to Oct. 1985 ............. $ 7,582.001
Dec. 31, 1985 .................. 257,122.45
Mar. 30, 1986 .................. 421,843.22
June 30, 1986 .................. 703,503.90
Sept. 30, 1986 ................. 145,621.55
Total ........................ 1,535,673.12
Petitioner executed unsecured promissory demand notes payable to Napa for three of the above "loans" for the quarters ending December 31, 1985, March 30, 1986, and June 30, 1986. No promissory note was issued for the $145,621.55 Shareholder Loan, and acknowledgment and authorization appear only in Napa's corporate plan of liquidation. Petitioner did not repay any of the $1,535,673.12 she borrowed from Napa during its corporate existence, and the entire balance of the Shareholder Loans remained unpaid at the time of Napa's liquidation. During 1985 and 1986, Napa also loaned approximately $3,541,000 to several unrelated third parties. Napa deducted $3,230,000 of this amount as bad debts on its final Federal corporate income tax return.
The public market price of HTI stock rose from $.50 per share in January 1985 to $14.75 per share on April 18, 1986. On April 19, 1986, the value of HTI stock started to plummet due, in part, to an unfavorable report in Barron's magazine. By April 28, 1986, the price of HTI stock had dropped to $1.31 per share, and by July 31, 1986, the market price was $.19 per share.
On June 12, 1986, Angus MacPherson sued Donaldson, Lufkin & Jenrette (DLJ), a New York brokerage firm, asserting, inter alia, that DLJ had wrongfully converted 30,000 shares of HTI stock at distressed prices. Thereafter the case was removed to the U.S. District Court for the Central District of California, and DLJ counterclaimed against Napa, HTI, TSV, HCS, James Merriam, petitioner, and others for $18 million, alleging that they conspired to commit securities fraud, engaged in unlawful insider trading, and illegally manipulated the price of HTI stock. Some of the parties in the lawsuit also were persons or companies to whom Napa had loaned nearly $3 million. Those parties/borrowers were Longmount Capital Corp. (LCC)2 ($2,495,000), Brenton Construction Corp. ($300,000), and David Lackey ($110,000) (collectively referred to as the Unrelated Borrowers).
When Napa completed its plan of liquidation on September 30, 1986, the Unrelated Borrowers did not have the financial ability to repay their loans from Napa. The DLJ lawsuit was still in the discovery phase when Napa was liquidated, and the value of the loans was contingent upon whether the Unrelated Borrowers would have prevailed in the lawsuit against Napa. Extensive litigation ensued, and the lawsuit was ultimately settled in September of 1987. None of the Unrelated Borrowers, who had counter-claimed against DLJ, realized any recovery from the litigation. The only party realizing any recovery was Angus MacPherson.
On August 4, 1986, petitioner initiated the liquidation process of Napa under Colorado State law. On August 12, 1986, Napa filed a statement of intent to dissolve with the Colorado secretary of state. On October 20, 1986, Napa filed its articles of dissolution with the Colorado secretary of state. On September 30, 1986, Napa was liquidated, and petitioner surrendered all of her stock in Napa in exchange for a distribution by Napa to her of all Napa's assets. At the time of Napa's liquidation, petitioner could have repaid the face amount of the Shareholder Loans. While petitioner did not have the cash available to pay the Shareholder Loans, she would have had the ability to repay the Shareholder Loans if she had liquidated her assets. At the time of the liquidation, the HTI stock held by Napa was worthless.
By reason of the liquidation, Napa was rendered insolvent and without the means to pay the corporate income tax in the amount of $461,781 it reported as due on its Federal corporate income tax return for the taxable period ending September 30, 1986.
In connection with Napa's liquidation, the Shareholder Loans payable by petitioner to Napa were stamped "cancelled" and "paid" with the date September 30, 1986. The fourth and final loan from Napa to petitioner in the amount of $145,621.55 was contained in the final plan of liquidation and also was canceled as part of the liquidation. Napa's plan of liquidation provided, in pertinent part, as follows:
FURTHER RESOLVED, that Dori Merriam borrowed $145,621.55 from Napa from July through September, 1986; such loan (as well as all other outstanding loans from Napa to Dori Merriam) to be discharged upon the exchange and surrender by Dori Merriam of Napa common stock certificate number 1 (10,000 shares) as part of this Plan of Liquidation.
In addition to the forgiveness of the Shareholder Loans, Napa transferred $15,267.18 of other assets to petitioner as follows: (1) Walter Mack promissory note (value $10,000); (2) 8,086,662 shares of restricted common stock of HTI (value $0); and (3) cash in the Frontier bank accounts (value $5,267.18).
James Merriam conferred...
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