Thompson v. Cent. Ohio Cellular, Inc.

• Decision Date: 28 February 1994
• Docket Number: No. 64545,64545
• Parties: THOMPSON, Appellant, v. CENTRAL OHIO CELLULAR, INC., f.k.a. CELLWAVE, INC., et al., Appellees. *
• Court: Ohio Court of Appeals

Page 530

93 Ohio App.3d 530

639 N.E.2d 462

THOMPSON, Appellant, v. CENTRAL OHIO CELLULAR, INC., f.k.a. CELLWAVE, INC., et al., Appellees. ^*

No. 64545.

Court of Appeals of Ohio, Eighth District, Cuyahoga County.

Decided Feb. 28, 1994.

Jones, Day, Reavis & Pogue, Richard I. Werder, Jr., Randal S. Baringer and Elizabeth A. Grove, Cleveland, for appellant.

William F. Gerstenslager and John J. Horrigan, Cleveland, for appellees.

NUGENT, Judge.

This is an appeal from the decision of the Cuyahoga County Court of Common Pleas, which granted the motion to dismiss filed by the defendants-appellees.

Plaintiff-appellant William J. Thompson (hereinafter "appellant") initiated the present action through the filing of his complaint on June 10, 1992. Appellant named as defendants Cellwave, Inc. (now known as "Central Ohio Cellular, Inc."), James F. Burke (a director and shareholder of Cellwave), John T. Horrigan (Chairman of Cellwave's Board of Directors and shareholder), Susan K. Van Buren (a director and shareholder of Cellwave), and Bernard F. Zaucha (Cellwave's Treasurer, a member of the board of directors, and a shareholder). Appellant's complaint alleged causes of action for breach of fiduciary duties (Count I), breach of good faith and fair dealing (Count II), and fraud (Count III).

The gist of appellant's complaint alleges that Cellwave (an Ohio corporation which, for federal income tax purposes, has elected to be treated as an "S corporation") and the individual defendants manipulated the financial results of Cellwave for 1991 and reported those results to the Internal Revenue Service ("IRS") in such a way as to shift a significant tax burden properly borne by the individual defendants and other shareholders of Cellwave in 1992 to appellant in 1991. The associated taxable income was the result of a transaction in which Cellwave sold the majority interest in its Michigan system (appellees refer to this as the "Michigan 9" interest, see appellees' motion to dismiss) on March 11, 1992. Appellant alleges that Cellwave and the individual defendants improperly caused this transaction to be treated as having produced 1991 income without any legitimate business or legal justification and for the sole purpose of harassing, annoying and embarrassing him. Appellant further alleges he called the improper tax treatment to the attention of Cellwave and the individual defendants on several occasions; he provided extensive authority and analysis showing it to be wrongful, improper and legally unjustified; and he requested that Cellwave and the individual defendants correct the error and provide the corrected information to the IRS. Defendants, however, have refused to do so.

In his complaint, appellant alleges that he was a shareholder of Cellwave owning forty-four shares of Cellwave's common stock. On November 8, 1991, he sold all of his stock in Cellwave to the individual defendants and several other Cellwave shareholders. It is undisputed that appellant was a shareholder of Cellwave for purposes of Cellwave's 1991 tax return and, under applicable provisions of the Internal Revenue Code (the "IRC"), and IRS regulations, he should have been allocated a pro-rata share of Cellwave's 1991 net income or loss. Appellant currently owns no stock in Cellwave and will have none of Cellwave's 1992 income or expenses allocated to him.

On April 1, 1992, Cellwave provided appellant with an allegedly improper and unlawful IRS Schedule K-1, which reflected, among other things, an allocation to him of $6,459,644 of net long-term capital gain for 1991. Appellant alleged that this allocation was based on an improper and unlawful purported realization and recognition of at least approximately $12 million and as much as approximately $14 million in net long-term capital gain on Cellwave's 1991 federal income tax return.

Appellant's complaint adds that as of November 8, 1991, when the sale of his stock in Cellwave became effective, Cellwave had earned no significant taxable income during 1991. Appellant stated that Cellwave claimed to have earned approximately $14 million in taxable income before December 1, 1991 by virtue of two transactions in which it disposed of its Michigan system. The first transaction closed on November 18, 1991. The second transaction, however, was subject to, and could not be consummated without, the approval of the Federal Communications Commission ("FCC"), which approval was not obtained until February 5, 1992. Thereafter, the second transaction did not close until March 11, 1992. Appellant adds that Cellwave and the individual defendants asserted that these two transactions constituted "one integrated transaction" that, for tax purposes, occurred in 1991.

Appellant's complaint alleges that under the applicable provisions of the IRC, IRS regulations, and controlling authority, the proceeds of the sale of the Michigan assets were not properly includable in Cellwave's 1991 taxable income. More specifically, appellant alleges that the "defendants have contended, with no proper basis whatsoever, that the two sales were 'one integrated transaction,' subject to 'installment sale' treatment under applicable provisions of the Code and IRS regulations. They have purportedly 'elected out' of installment sale tax treatment so as to treat all of the income received by Cellwave in connection with the two sales, including that received in 1992, as 1991 income."

As a result, appellant alleges that Cellwave's 1991 taxable income was overstated by at least approximately $12 million and as much as approximately $14 million. Further, as a result of the "pass-through" nature of a Subchapter S corporation, Cellwave overstated appellant's 1991 taxable income by at least $5,524,934 and by as much as $6,459,644, and improperly reported this inflated taxable income to the IRS. Appellant contends that the improper and unlawful actions of Cellwave and the individual defendants were designed to shift a significant tax burden properly borne by the individual defendants and other Cellwave shareholders in 1992 to appellant in 1991.

Appellant's complaint further states that on May 4 and May 19, 1992, appellant requested Cellwave and the individual defendants to correct Cellwave's 1991 federal income tax return and the Schedule K-1 provided to him so that he could file his own income tax return without incurring significant unnecessary expense and without the risk of adverse consequences with the IRS. Cellwave and the individual defendants, however, refused to do so.

With respect to his claim for breach of fiduciary duties, appellant made the following allegations:

"20. In preparing or causing the preparation of Cellwave's 1991 federal income tax return and Thompson's related Schedule K-1 attributing taxable income to him by virtue of his status as a Cellwave shareholder, Cellwave and the Individual Defendants owed Thompson fiduciary duties of care, honesty, and loyalty.

"21. By virtue of the conduct described above, Cellwave and the Individual Defendants breached their fiduciary duties to Thompson. In addition, Cellwave aided and abetted the Individual Defendants' breach of fiduciary duties. Defendants' conduct has been intentional and malicious and purposefully designed to injure Thompson.

"22. As a proximate result of the breaches of fiduciary duty described herein, Thompson has been damaged in an amount to be proved at trial."

Finally, with respect to his claim for fraud, appellant made the following allegations:

"28. In preparing or causing the preparation of Cellwave's 1991 federal income tax return and Thompson's related Schedule K-1, Cellwave and the Individual Defendants have made false statements with knowledge of their falsity and with the intent and in the expectation that they would be relied on by Thompson and the IRS. In particular, they have overstated Cellwave's 1991 taxable income on Cellwave's federal income tax return and the accompanying schedules filed with the IRS, and have, in those same documents, overstated Thompson's 1991 taxable income and attributed to him significant 1991 tax liability properly borne by the Individual Defendants and other shareholders of Cellwave in 1992.

"29. By virtue of the conduct described above, Cellwave and the Individual Defendants have defrauded Thompson and the IRS. Defendants' conduct has been intentional and malicious and purposefully designed to injury Thompson.

"30. As a proximate result of the fraud described herein, Thompson has been damaged in an amount to be proved at trial."

In response to appellant's complaint, the defendants filed a joint motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Civ.R. 12(B)(6). Defendants' motion sought dismissal of all three counts in appellant's complaint. In defendants' brief in support of their motion, and without support from outside evidentiary materials, appellees explained that Cellwave was awarded two cellular communications licenses from the FCC. The sale of Cellwave's "Michigan 9" license was the result of a negotiated agreement stemming from a federal lawsuit brought by the individual defendants (appellees refer to them as the "Federal plaintiffs") in the instant suit against appellant for securities fraud in violation of federal securities law. Appellees claim the comprehensive agreement was embodied in a series of integrated documents. However, appellant did not attach any of these agreements to his complaint, and defendants did not attach any of these agreements to their brief in support of their motion. According to appellees, it was pursuant to these comprehensive agreements that appellant sold his shares of Cellwave to the individual defendants herein (plaintiffs in the federal suit) and resigned as President and Director of Cellwave. Further, the defendants herein sold the Michigan system to the highest bidder.

Appellees argued that they fully discharged the duties...