Stuart v. Comm'r
| Decision Date | 01 April 2015 |
| Docket Number | Docket No. 1685-11,Docket No. 1687-11,Docket No. 1686-11,144 T.C. No.12,Docket No. 1688-11. |
| Parties | WILLIAM SCOTT STUART, JR., TRANSFEREE, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
R issued notices of transferee liability to Ps to collect L's unpaid Federal income tax pursuant to I.R.C. sec. 6901. R argues that the following two-step analysis applies in determining whether Ps are liable for L's unpaid tax: (1) applying doctrines pertinent to interpreting the Internal Revenue Code, determine whether the form of the subject transactions should be disregarded in favor of deciding, on the basis of the substance of the transactions, whether Ps are transferees for purposes of I.R.C. sec. 6901 and (2) apply State law to the transactions resulting from the first step.
Held: Following our report in Swords Trust v. Commissioner, 142 T.C. 317 (2014), R's two-step analysis is rejected; additional reasons are stated.
Held, further, transferee liability is established under the Nebraska Uniform Fraudulent Transfer Act (UFTA) because L's transfer was constructively fraudulent as to R and the transfer was made for the benefit of Ps.
Held, further, unmatured tax liabilities are "claims" within the meaning of that term as defined in UFTA.
Held, further, Ps, for whose benefit the transfer was made, are transferees within the meaning of I.R.C. sec. 6901.
Steven Spencer Brown and Denis John Conlon, for petitioners.
H. Barton Thomas, Jr. and George W. Bezold, for respondent.
HALPERN, Judge: These four cases have been consolidated for purposes of trial, briefing, and opinion. Little Salt Development Co. (Little Salt or company) is a Nebraska corporation. Petitioners were shareholders of Little Salt in 2003 until, in August, they sold their shares. Respondent determined and assessed a deficiency in Little Salt's 2003 Federal income tax of $145,923, along with an accuracy-related penalty of $58,369. Little Salt did not pay those amounts (together, unpaid 2003 tax). By separate notices of liability (notices), respondentdetermined that petitioners, as transferees of Little Salt's property, were liable for Little Salt's unpaid 2003 tax to the extent of the net value of the assets that each purportedly received from Little Salt.2 Respondent calculated each petitioner's respective liability as follows:
Petitioner Liability William Scott Stuart, Jr. $119,609 Arnold John Walters, Jr. 59,804 James Stuart, Jr. 59,804 Robert Edwin Joyce 59,804
Petitioners assign error to respondent's determinations of their transferee liability.
Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect at the time of the purported transfers in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. All dollar amounts have been rounded to the nearest dollar.
The parties have stipulated certain facts and the authenticity of certain documents. The facts stipulated are so found, and the documents stipulated are accepted as authentic.
At the time they filed the petitions, all petitioners resided in Nebraska except for William Scott Stuart, Jr. (Dr. Stuart), who resided in Minnesota. Together with the Estate of Charles Craft (which is not a party), they owned all the shares of Little Salt at the time of the stock sale discussed infra.
Little Salt, a so-called C corporation (subject to the tax on corporations imposed by section 11), was organized under the laws of Nebraska in 1960. It is a fiscal year taxpayer whose fiscal year ends on September 30. As of August 6, 2003, its shares were owned as follows:
Name Number of shares Percentage ownership William Scott Stuart, Jr. 20 33.336 Robert Edwin Joyce 10 16.666 Arnold John Walters, Jr. 10 16.666 James Stuart, Jr. 10 16.666 Estate of Charles Craft1 10 16.666
1Charles Craft died on June 24, 2003.
During 2003, Mr. Joyce was president of the company; Mr. Walters was both secretary and treasurer. All of Little Salt's shareholders (shareholders), other than the representative of Mr. Craft's estate, were directors.
Until June 11, 2003, Little Salt owned 160 acres of saline wetlands (land) on the outskirts of Lincoln, Nebraska. On that date, it sold the land to the City of Lincoln, Nebraska, pursuant to an assignment of contract by the Nebraska Game and Parks Commission (commission) to the city. Before its sale, the land was used for farming and for duck hunting. The land is a habitat for the Salt Creek tiger beetle, a critically endangered species. The city purchased the land for $472,000, and, after subtracting settlement charges, Little Salt received $471,111. After it sold the land (land sale), Little Salt's only asset was cash. Little Salt realized again of $432,148 on the land sale. After the land sale, the company did not engage in any business activity.
During Little Salt's negotiations with the commission leading up to the land sale, one of the commission's personnel, Bruce Sackett, received a telephone call and two letters from a representative of MidCoast Investments, Inc. (MidCoast). In the first letter, MidCoast describes itself as a company interested in purchasing the stock of C corporations that have sold their assets and that, as a result, have realized a significant taxable gain. In both letters, MidCoast represents that it would purchase the Little Salt shares from the shareholders and would pay them significantly more than the shareholders would receive if they were to dissolve the company and receive the proceeds of the sale in redemption of their shares. In the second letter, MidCoast describes its post-share-acquisition plan as follows: "[U]nder MidCoast's ownership, the company will re-engineer its operations into the asset recovery business--i.e. the purchase and collection of delinquent account receivables." Mr. Sackett delivered the two letters to Mr. Joyce, Little Salt's president. Mr. Sackett had not investigated MidCoast, and he had no further contact with MidCoast after delivering the letters to Mr. Joyce.
Subsequently, by letter dated April 23, 2003, addressed to the shareholders, MidCoast proposed to acquire all of Little Salt's outstanding shares. The letter specified that the price to be paid would be "equal to the cash in the Company as of the * * * [closing date] reduced by sixty-four and 92/100 percent (64.92%) of the Company's combined state and federal corporate income tax liability for its current tax year (the 'Deferred Tax Liability')."
The letter contained an example showing net assets in Little Salt of $472,000, which, when reduced by a combined Federal and State tax liability of $171,040, resulted in a net Little Salt value of $301,788. The example added an "Asset Recovery Premium" of $60,000 to Little Salt's net value, which resulted in a price of $361,788 to be paid by MidCoast to the shareholders for their shares.
The letter also contained MidCoast's covenant "that it shall cause the Company [i.e., Little Salt] to pay the Deferred Tax Liability to the extent that the Deferred Tax Liability is due given the Company's post-closing business activities and shall file all federal and state income tax returns on a timely basis related thereto."
All of the shareholders signed a copy of the letter, agreeing to be bound by its terms and conditions. Dr. Stuart testified that, before signing the letter, he "may have very briefly skimmed it", because he "relied on * * * [his] partners inthis transaction." Mr. James Stuart, Jr. (Mr. Stuart), testified that he "probably [did] not" read it before signing it. Mr. Walters "glanced through it." Mr. Joyce testified that he is "sure that he probably did [read it]."
By mid-June 2003, the shareholders had determined to proceed with selling their shares to MidCoast (sometimes, stock sale). They retained local attorney W. Michael Morrow to represent them. Mr. Morrow was not hired to investigate MidCoast or analyze whether the stock sale was a tax shelter. His investigation of MidCoast was limited to his review of MidCoast's corporate documents. MidCoast hired local attorney W. Scott Davis to represent it.
Through July and early August 2003, Messrs. Morrow and Davis (and their clients) addressed the prerequisites for the stock sale. The Share Purchase Agreement (agreement) identifies the purchasers as MidCoast Credit Corp. and MidCoast Acquisition Corp. (which, collectively, along with MidCoast Investments, Inc., we will also refer to as MidCoast) and provides that it is between MidCoast, Little Salt, and the shareholders. It recites that the shareholders are the owners of 100% of the shares of Little Salt and that MidCoast desires to purchase those shares from the shareholders and that the shareholders desire to sell their shares to MidCoast. It contains numerous premises, promises, representations, warranties, and covenants, among which are the following.
• MidCoast agrees to purchase from the shareholders their shares in Little Salt, and the shareholders agree to sell to MidCoast those same shares.
• The price for all of the shares is $358,826, to be paid by wire transfer to Mr. Morrow's firm's trust account.
• The combined Federal and State income tax liability of Little Salt "resulting from the sale, conveyance or other disposition of its assets and * * * [its] operations" for its current (2003) fiscal year as of the closing date "is $167,737.00 ('the Tax Liability')".
• After the closing date, it will have no liabilities other than the Tax Liability.
• MidCoast will cause Little Salt "to pay the Tax Liability, to the extent that the Tax Liability is due given the Company's post-Share Closing business activities, and shall file all federal and state income taxes on a timely basis related thereto."
• As a condition of MidCoast's obligations under the agreement, at or before the closing date, "[Little Salt]...
To continue reading
Request your trial