Scott v. Commissioner
| Decision Date | 30 November 1998 |
| Docket Number | Docket No. 5245-95. |
| Citation | 76 T.C.M. 940 |
| Parties | Thomas H. Scott and Lynn D. Scott, Transferees v. Commissioner. |
| Court | U.S. Tax Court |
Thomas G. Hodel, for the petitioners. William R. Davis, Jr. and Jerry L. Leonard, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
In separate notices of transferee liability (notices), respondent determined that petitioner Thomas H. Scott (Mr. Scott) and petitioner Lynn D. Scott (Ms. Scott) are liable as transferees of Mountain States Stock Transfer Agents, Inc. (MSSTA) (1) in amounts not exceeding $104,580 and $95,072, respectively, for MSSTA's unpaid Federal income tax (tax) liability for 1989 of $164,981 (MSSTA's unpaid tax liability) and (2) for "interest as provided by law".1
We must decide whether Mr. Scott and Ms. Scott (collectively, the Scotts) are liable as transferees of MSSTA in amounts not exceeding $104,580 and $95,072, respectively, for MSSTA's unpaid tax liability and, if so, whether they are liable for interest on such respective amounts from March 15, 1990, the date on which MSSTA's unpaid tax liability became due, to January 10, 1995, the date on which the notices were issued.2 We hold that Mr. Scott is so liable and that Ms. Scott is not.
Some of the facts have been stipulated and are so found unless otherwise stated herein.
At the time the petition was filed, petitioners resided in Denver, Colorado.
On October 2, 1980, MSSTA was incorporated under the laws of the State of Colorado. From its incorporation until September 14, 1989, James R. Carter (Mr. Carter) owned 52 percent, and each of the Scotts owned 24 percent, of the stock of MSSTA, and Mr. Carter and Mr. Scott were directors and officers of that company, Mr. Scott having served as its president. At all relevant times prior to September 14, 1989, Mr. Carter's son, Rock Carter, also was a director of MSSTA.
At all relevant times, MSSTA was in the business of acting as a securities transfer agent (securities transfer agent business), principally for corporations whose stock was traded on the over-the-counter market in Denver, Colorado. MSSTA's primary competitor during the mid-to-late 1980's was American Securities Transfer, Inc. (AST).3 Throughout that period, AST was wholly owned by Charles R. Harrison (Mr. Harrison), its president who was in charge of operational and marketing matters, and Bruce E. Hall (Mr. Hall), its treasurer and secretary who was in charge of financial, accounting, and tax matters. At all relevant times, Mr. Hall, a certified public accountant (C.P.A.), also engaged in a small individual tax practice.
Prior to 1989, MSSTA's business had been very profitable. Based on his assessment of the securities transfer agent industry, Mr. Scott determined around early 1989 that the level of profits which MSSTA had enjoyed over the prior several years would not continue. Mr. Scott and Mr. Carter met sometime during the first several months of 1989 to discuss MSSTA's financial situation. Mr. Scott wanted to remain involved as an officer and an owner of MSSTA's securities transfer agent business, whereas Mr. Carter desired to withdraw his investment in that business and use it for other purposes. Mr. Scott and Mr. Carter decided to attempt to merge MSSTA with another company in the securities transfer agent business or to sell MSSTA's assets to such a company and then liquidate MSSTA. Mr. Carter suggested to Mr. Scott that he approach AST to explore a possible combination of MSSTA and AST. Mr. Scott contacted Mr. Harrison sometime around the spring of 1989, and they held preliminary discussions relating to that possibility.
Around May 1989, Mr. Scott met (May 1989 meeting) with Stephen Hrynik (Mr. Hrynik) who had been serving for about six or seven years as MSSTA's outside accountant, auditor, and tax return preparer. Mr. Hrynik, a C.P.A. since 1976, had first met Mr. Scott in the mid-1970's when Mr. Hrynik was employed by another C.P.A. who was representing Mr. Scott and Mr. Scott's business on accounting and tax matters, and Mr. Hrynik was assigned to work on certain of those matters. At the May 1989 meeting, Mr. Scott informed Mr. Hrynik about the discussions that he was having regarding the possibility of combining MSSTA and AST. Mr. Hrynik advised Mr. Scott at that meeting about the differences between a merger and an asset sale. Mr. Scott did not give Mr. Hrynik any documents relating to a possible combination of MSSTA and AST at the May 1989 meeting.
During the discussions between Mr. Scott and Mr. Harrison about combining the businesses of MSSTA and AST, Mr. Scott was acting on behalf of MSSTA, Mr. Carter, Ms. Scott, and himself, and Mr. Harrison was acting on behalf of AST, Mr. Hall, and himself. During those discussions, it was determined that any combination of MSSTA and AST would have to be structured as an asset acquisition, and not a merger, so that the acquiring company in any such combination would not be responsible for the liabilities of the acquired company. Mr. Scott informed Mr. Harrison that, regardless how the combination of MSSTA and AST was structured, Mr. Scott and Ms. Scott, but not Mr. Carter, wanted to remain as stockholders of the combined businesses, and Mr. Scott, but not Mr. Carter, desired to remain as an officer thereof.
As a result of negotiations between Mr. Scott and Mr. Harrison, MSSTA and AST agreed in principle that MSSTA would sell its assets to AST; Mr. Scott and Ms. Scott, but not Mr. Carter, would acquire stock of AST; Mr. Scott would become president of AST; and AST would enter into consulting agreements with Mr. Scott and Mr. Carter, respectively. Thereafter, Mr. Hall began meeting with Mr. Scott and Mr. Harrison in order to negotiate the specific terms of the foregoing agreement in principle. In order to assist them in those negotiations in determining, inter alia, the value of the respective assets of AST and MSSTA and the total number of shares of AST stock that the Scotts would be able to acquire as part of the transaction in which AST purchased MSSTA's assets, AST directed Ed Schultz (Mr. Schultz), AST's outside C.P.A., to prepare business valuations of AST and MSSTA. Although not a business valuation expert, Mr. Hrynik, as MSSTA's outside accountant and auditor, met twice with Mr. Schultz regarding Mr. Schultz' assignment.
Based principally on Mr. Schultz' business valuations of AST and MSSTA and Mr. Carter's decision not to acquire stock of AST as part of the transaction in which AST purchased MSSTA's assets, Mr. Harrison and Mr. Hall informed Mr. Scott, inter alia, that AST was willing to buy MSSTA's assets for approximately $800,000 and that, as part of that transaction, the Scotts would be permitted to purchase for approximately $300,000 a total of about 33 percent of AST's stock. Mr. Scott, Mr. Carter, and MSSTA tentatively agreed to the foregoing terms proposed by Mr. Harrison, Mr. Hall, and AST. They also tentatively agreed with Mr. Harrison, Mr. Hall, and AST that (1) AST would pay (a) $600,000 of the $800,000 purchase price for MSSTA's assets directly to MSSTA and (b) the $200,000 balance, as well as an additional negotiated amount, directly to Mr. Carter under an agreement by Mr. Carter to consult and not to compete with AST; (2) MSSTA would make liquidating distributions to the Scotts and Mr. Carter, based on their respective stock ownership of MSSTA, of the $600,000 that it would receive directly from AST; and (3) the Scotts would use money that they would receive from MSSTA in such liquidating distributions to assist them in purchasing stock in AST.
Mr. Harrison and/or Mr. Hall directed AST's attorney, Gary LaPlante (Mr. LaPlante), to prepare preliminary drafts of the various documents that would be needed to implement the tentative agreements that had been reached regarding, inter alia, MSSTA's sale of its assets to AST, the Scotts' respective purchases of stock of AST, and consulting agreements between AST and Mr. Scott and Mr. Carter, respectively. (We shall sometimes refer to MSSTA's sale of its assets to AST and all of the transactions that occurred simultaneously with that sale as the MSSTA transaction.)
Mr. Scott retained Arthur Bosworth (Mr. Bosworth), an attorney, to represent MSSTA and the Scotts in the MSSTA transaction. Mr. Bosworth had previously represented them with respect to various litigation matters. Mr. Bosworth initially declined to represent MSSTA and the Scotts in the MSSTA transaction because he was not competent to give tax advice. However, Mr. Bosworth agreed to represent them after Mr. Scott told him that he had retained Mr. Hrynik for assistance on tax and accounting matters relating to the MSSTA transaction. Mr. Bosworth informed Mr. Harrison, Mr. Hall, and AST's attorney, as well as Mr. Scott, but not Ms. Scott, that he was not representing MSSTA and the Scotts with respect to any tax matters.
Around the end of August 1989, Mr. Scott asked Mr. Hall what the tax consequences would be to MSSTA and the Scotts under the tentative agreements that had been reached regarding the MSSTA transaction. Mr. Hall responded that (1) MSSTA's tax liability would be approximately $100,000 if it reported the $600,000 that AST had tentatively agreed to transfer directly to it as the amount realized from the sale of its assets; (2) there would be no tax consequence to MSSTA as a result of AST's payment directly to Mr. Carter of $200,000 of the total $800,000 that AST was willing to pay for MSSTA's assets; and (3) based on the tax law relating to capital gains, the Scotts would owe tax on the capital gains that they would realize when MSSTA made liquidating distributions to them as 48-percent stockholders of MSSTA of approximately $300,000, which tax would be equal to about one-third of such gains. Because of that capital gains tax that the Scotts would owe, they would not have sufficient cash from the MSSTA transaction...
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