US v. Red Stripe, Inc.

• Decision Date: 20 March 1992
• Docket Number: No. CV 89-3504.,CV 89-3504.
• Citation: 792 F. Supp. 1338
• Parties: UNITED STATES of America, Plaintiff, v. RED STRIPE, INC., f/k/a Asher Bros., Inc. and George Asher, Defendants.
• Court: U.S. District Court — Eastern District of New York

792 F. Supp. 1338

UNITED STATES of America, Plaintiff, v. RED STRIPE, INC., f/k/a Asher Bros., Inc. and George Asher, Defendants.

No. CV 89-3504.

United States District Court, E.D. New York.

March 20, 1992.

Department of Justice Tax Div., Washington, D.C. (Philip Karter and Andrew D. Plepler, of counsel), for plaintiff.

Kostelanetz, Rithoz, Tigue & Fink, New York City (James C. Sherwood, of counsel), for defendants.

MEMORANDUM OF DECISION AND ORDER

MISHLER, District Judge.

The United States of America ("Government"), claims that defendant Red Stripe, Inc. formerly known as Asher Bros., Inc. ("hereinafter referred to as "Red Stripe")¹, has to pay federal corporate income taxes for the fiscal years ending June 30, 1975, 1976, 1977, 1978 and 1979 and seeks to reduce to judgment the corporate income taxes due from Red Stripe, Inc.

The Government also maintains that the transfer of Red Stripe's assets to its sole stockholder, defendant George Asher ("Asher"), was a fraudulent conveyance. Plaintiff seeks to reduce to judgment Asher's tax liability as a transferee for the unpaid taxes on investments in four limited partnerships for the tax years 1975, 1976 and 1977.

The issues were tried to the court.

Red Stripe was a New York corporation with its principal place of business in New Hyde Park, New York. Defendant George Asher, who currently resides in Hollywood Florida, lived in Great Neck, New York, during the time of the events complained of.

LIABILITY FOR TAX YEARS 1975, 1976 AND 1977

For the tax years ending in 1975, 1976 and 1977, Red Stripe filed income tax returns which claimed tax reductions and investment credits relating to its investment in four limited partnerships, i.e., Brighton Associates, Plaza Group, Sunny Hill Associates and Road Group.

On September 30, 1983, the Internal Revenue Service ("I.R.S.") and Red Stripe entered into an agreement, pursuant to I.R.C. § 7121(b), stipulating that Red Stripe made improper tax deductions and investment credits on its tax returns for the taxable years of 1975, 1976, and 1977, in relation to its investment in the four limited partnerships. Red Stripe also agreed to extend the time within which an assessment could be made to December 31, 1983.

On October 20, 1983, the I.R.S. assessed deficiencies of $11,980.00 for the taxable year of 1975, $47,166.00 for the tax year 1976 and $198,848.00 for the tax year of 1977. This did not include the statutory rate of interest.

Red Stripe claims that it is not responsible for these taxes. It maintains that these debts were assumed by the Beatrice Food Corporation ("Beatrice"), when Beatrice purchased Red Stripe from Mr. Asher, in exchange for 180,000 shares of Beatrice common stock, in August, 1979.

The Beatrice stock that was transferred to Red Stripe was valued at $3,982,500 or $22.125 per share. The parties intended the transaction to qualify as a tax free reorganization pursuant to I.R.C. § 368(a)(1)(C). After the reorganization, which occurred in August 1979, Red Stripe ceased to function as an operating business.

Pursuant to the Agreement and Plan of Reorganization ("Agreement") between Beatrice and Red Stripe, it is unclear whether Beatrice agreed to assume some, or all, of Red Stripe's tax liabilities. For the most part, the Agreement appears to state that Beatrice did not agree to assume the tax liability for Red Stripe's limited partnership investments.

Section 1.02 of the Agreement states in pertinent part that Beatrice did not acquire:

"the assets reflected on the Company Balance sheet under the caption `Deferred Credits — Partnership interest and other' (including the limited partnership interests of the Company in The Road Group, The Plaza Group, Brighton Associates and Sunny Hill Associates...."

Section 1.03 of the Agreement states that Beatrice would not assume any:

"liability or obligation ... in connection with or relating to any of the Retained Company Assets (including the limited partnership agreements referred to in Paragraph 8(d) of the Company letter."²

The Agreement states in section 1.04(a) that:

Beatrice shall not be responsible for, and shall not assume or undertake to pay, perform, satisfy or discharge, any liability or obligation of the Company or the Company Liabilities and Obligations.

1.04(b) states:

The company and/or the Company Shareholder, as the case may be, shall remain responsible for the Retained Company liabilities and obligations.

However, Exhibit G, the Assumption Agreement and Undertaking, states on page 2 that Beatrice agrees to assume the "liabilities and obligations of the Company (Red Stripe) for federal and state income taxes referred to in paragraph 11 of the Company Letter...."

Paragraph 11, § (c) of the Company Letter states:

The Company has waived the statute of limitations with respect to the assessment of federal income taxes relating to the limited partnership interests of the Company in The Road Group, The Plaza Group, Brighton Associates and Sunny Hill Associates.

The Assumption Agreement and Undertaking appears to state that Beatrice would be responsible for the tax liabilities on the limited partnerships. In contrast, the Agreement and Plan of Reorganization states that Red Stripe would be responsible for the taxes. We do not attempt to construe the intent of the contracting parties because, as discussed below, the Assumption Agreement has no effect on Red Stripe's tax liability.

All of Red Stripe's operating assets, except for a sailboat valued at roughly $27,000, a condominium valued at approximately $100,000 and an interest in worthless limited partnership tax shelters, were transferred to Beatrice. One month after the reorganization, 153,000 Beatrice stock shares were transferred to Asher. Shortly thereafter, the condominium and sailboat were conveyed to Asher. Over the next year, the remaining 27,000 shares of Beatrice stock were released from escrow and transferred to Asher.

In exchange for the transfer of Beatrice stock, Asher redeemed all of his stock in Red Stripe. However, his Red Stripe stock retained little, if any value, because the corporation's only valuable asset, the Beatrice stock, had already been transferred out of the corporation, to its sole stockholder.

DISCUSSION

Defendants claim that they are not responsible for the tax liability incurred between 1975-1977 because the government's complaint was not filed within six years of the underlying assessment.³ We find this argument to be without merit.

The Government has produced a Certificate of Assessments and Payments ("Certificate") which states that an assessment for the tax years 1975, 1976, and 1977 was made on October 20, 1983. The Government's complaint was filed exactly six years later, on October 20, 1989.

Defendants argue that the assessment of tax for the years in question occurred not on October 20, 1983, but rather on or before October 3, 1983. To support this contention, defendant's refer to a letter written by Diane R. Mirabito, an IRS attorney, ("Mirabito letter") directed to Red Stripe's former counsel, Bernard Segal, Esq. (Exhibit C). The letter states in pertinent part that "on October 3, 1983 the Internal Revenue Service filed Notices of Federal Tax Lien against Red Stripe, Inc. in the amounts of $22,541.45, $86,570.14, and $349,508.14 for the fiscal years ended June 30, 1975, June 30, 1976, and June 30, 1976, and June 30, 1978, respectively."

Since an assessment is a necessary prerequisite to the issuance of a tax lien⁴, which the letter states was filed on October 3, 1983, defendant maintains that "an assessment must have been issued on that date or earlier." (Defendant's Post-Trial Memo. at 6).

"Statutes of limitation barring the collection of taxes must receive a strict construction in favor of the government." Loewer Realty Co. v. Anderson, 31 F.2d 268, 269 (2d Cir.), cert. denied, 280 U.S. 558, 50 S.Ct. 17, 74 L.Ed. 613 (1929); Kahn v. United States, 444 F.Supp. 388, 392 (S.D.N.Y.1977), aff'd 590 F.2d 48 (2d Cir. 1978).

While defendants dispute the date contained in the Certificate, a Certificate is presumptive proof of a valid assessment.⁵ United States v. Lorson Electric Co., Inc., 480 F.2d 554 (2d Cir.1973); United States v. Chila, 871 F.2d 1015 (11th Cir.1989). The date of assessment found in the certificate is also presumptively valid. Brewer v. U.S., 764 F.Supp. 309, 315-16 (S.D.N.Y. 1991); United States v. Nuttall, 713 F.Supp. 132, 137 n. 8 (D.Del.), aff'd, 893 F.2d 1332 (3d Cir.1989); United States v. Dixon 672 F.Supp. 503, 505-06 (M.D.Ala. 1987), aff'd, 849 F.2d 1478 (11th Cir.1988) (per curiam); United States v. Posner, 405 F.Supp. 934 (D.Md.1975).

This presumption places the burden on the taxpayer to demonstrate by a preponderance of the evidence that the date of assessment is incorrect. Schaffer v. C.I.R., 779 F.2d 849, 857 (2d Cir.1985); United States v. Lease, 346 F.2d 696, 700 (2d Cir. 1965); United States v. Paladin, 539 F.Supp. 100, 102 (W.D.N.Y.1982). See also United States v. Strebler, 313 F.2d 402, 403-04 (8th Cir.1963):

At the trial of the case at bar the Government introduced evidence by way of a "Certificate of Assessment" which revealed appellee's liability for the amount of taxes claimed. The law is that such assessment is presumptively correct; and the "burden is on the taxpayer to overcome this presumption" by countervailing proof. (citations omitted).

The Mirabito letter is not entitled to the same presumption of validity as the Certificate. See Herbert v. U.S., 662 F.Supp. 573, 583 (S.D.N.Y.1987), (citing Heckler v. Community Health Services, 467 U.S. 51, 59-61, 104 S.Ct. 2218, 2223-24, 81 L.Ed.2d 42 (1984) and Schweiker v. Hansen, 450 U.S. 785, 788-89, 101 S.Ct. 1468, 1471, 67 L.Ed.2d 685 (1981) (per curiam)), rev'd on other grounds, 850 F.2d 32 (2d Cir.1988) (The government is not "bound by a position taken ... by one of its employees or agents.")⁶; Louderback v. United States, 500 F.Supp. 575, 579 (D.Co...