Morris v. Commissioner

MEMORANDUM OPINION

THORNTON, JUDGE: Respondent has determined that petitioner has liability as a transferee of Association Cable TV, Inc. (ACT), of $ 199,400, plus interest as provided by law. ¹ Respondent determined that for taxable year 1988, ACT has unpaid liability for Federal income taxes of $ 136,903, and additions to tax pursuant to sections 6653(b)(1) and 6661 of $ 102,677 and $ 34,226, respectively.

The issue for decision is whether petitioner is liable as the transferee of assets of ACT under section 6901 and, if so, the amount of his liability.

Unless otherwise indicated, all section*450 references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

BACKGROUND

The parties submitted this case fully stipulated without trial. ² The stipulation of facts is incorporated herein by this reference. When he petitioned the Court, petitioner resided in Panama City, Florida.

In 1985, petitioner, Franklin W. Briggs (Briggs), John L. Daniell (Daniell), and Michael Roy Gay (Gay) incorporated ACT, a Florida corporation that they owned equally. They organized ACT to provide cable television services to a beach resort in Panama City Beach, Florida, where ACT acquired cable television franchise rights. Petitioner was a shareholder, director, and officer of ACT.

In October 1988,ACT sold its assets, including cable franchise*451 rights, to Jones Spacelink, Ltd. (JSL). The purchase and sale agreement, executed October 27, 1988 (the purchase agreement), states that it was made by and among JSL, as the buyer, and ACT, Towers Development Co. of Panama City, Inc. (Towers Development), Towers Construction Co. of Panama City, Inc., ³ Briggs, Daniell, Gay, petitioner, and Sandra Morris, as sellers (identified collectively in the purchase agreement and hereinafter as the seller group). The purchase agreement states that the assets to be conveyed to JSL "include all tangible and intangible assets of the Seller Group". The stated purchase price of $ 1,522,080 was payable "to the Seller Group". Of this amount, $ 510,560 was payable to the seller group in cash at the closing, $ 500,000 was payable to the seller group in accordance with the terms of a covenant not to compete, and the balance of $ 511,520 was payable to the seller group in accordance with the terms of an agreement regarding additional cable subscribers.

*452 The covenant not to compete, also executed October 27, 1988, states that it was made and entered into by and between JSL, as buyer, and the "Sellers", comprising the same entities and individuals as the seller group. Under the covenant not to compete, "Each Seller" agreed not to compete with JSL for 5 years. The covenant not to compete states that JSL shall pay the $ 500,000 consideration for the covenant not to compete "to Sellers, c/o Franklin W. Briggs", with $ 333,400 payable on October 27, 1988, and the balance payable in four annual installments of $ 42,400 each, commencing October 27, 1989.

On November 4, 1988, pursuant to an agreement with ACT, JSL made a wire transfer to ACT's attorney, Glenn L. Hess (Hess), of $ 840,960. Hess deposited these funds into a client trust fund account. Of this amount, $ 510,560 was the cash payable at the closing, and $ 330,400 was the initial payment for the covenant not to compete. On November 7, 1988, pursuant to ACT's instructions, Hess issued four checks from the client trust fund account as follows:

           Payee        Amount

           _____        ______

*453         ACT          $ 309,666.66

        Daniell         132,823.33

        Gay           132,823.33

        Towers Development    265,646.68

                   ___________

         Total         840,960.00

The $ 265,646.68 check to Towers Development represented distributions to petitioner and Briggs of $ 132,823.34 each. ⁴

Also on November 7, 1988, ACT issued separate checks of $ 66,666.67 to each of its four shareholders, including petitioner. ⁵ Therefore, petitioner received from ACT gross distributions aggregating $ 199,490.01 ($ 66,666.67 plus $ 132,823.34). All these distributions occurred in the State of Florida.

*454 After the initial distribution of the sale proceeds on November 7, 1988, the remaining payments under the purchase agreement were distributed to ACT's shareholders directly. ⁶

For taxable year 1988, ACT issued petitioner a Form 1099- DIV, Statement for Recipients of Dividends and Distributions, showing cash liquidating distributions of $ 80,890.

The sale of ACT's assets to JSL on October 28, 1988, resulted in a complete dissolution or liquidation of ACT's assets, and the subsequent transfers to ACT's shareholders on November 7, 1988, of the cash proceeds that ACT received from the sale of its assets to JSL rendered ACT insolvent. After selling its assets to JSL, ACT transacted no other business, other than in February 1990 filing its 1988 Federal income tax return.

On its 1988 Federal income tax return, ACT took the position that the $ 405,776 gain it realized on the sale of its assets to JSL was nontaxable pursuant to section*455 337 because ACT had adopted a plan of complete liquidation on or before the sale date of the assets. In a notice of deficiency issued to ACT for taxable year 1988, respondent determined that ACT had not timely adopted a plan of liquidation and that the gain was taxable, resulting in an income tax liability for ACT of $ 136,903. Respondent also determined that ACT was liable for additions to tax of $ 102,677 under section 6653(b)(1) for fraud and $ 34,226 under section 6661 for substantial understatement of tax. ACT petitioned the Tax Court.

In Association Cable TV, Inc. v. Commissioner, T.C. Memo 1995-596, this Court held that ACT was liable for the tax on the gain from the sale of its assets to JSL because no plan of liquidation existed on or before the sale date. The Court also sustained the additions to tax for fraud and for substantial understatement. With respect to the addition to tax for fraud, the Court found that ACT, through the actions of Briggs and petitioner, had falsified documents to corroborate its 1988 Federal income tax return position that the asset sale constituted a nontaxable liquidation pursuant to section 337.

Having determined that the November*456 1988 distributions to its shareholders left ACT with insufficient funds to pay its 1988 corporate Federal income tax liability, respondent has sought to collect the liability from ACT's shareholders, including petitioner.

DISCUSSION

PETITIONER'S TRANSFEREE LIABILITY

Pursuant to section 6901, the Commissioner may proceed against a transferee of property to assess and collect Federal income taxes owed by the transferor. For this purpose, a transferee includes a shareholder of a dissolved corporation. See sec. 301.6901-1(b), Proced. & Admin. Regs. Section 6901 does not impose liability on the transferee but merely gives the Commissioner a procedure or remedy to enforce the transferor's existing liability. See Commissioner v. Stern, 357 U.S. 39, 42, 2 L. Ed. 2d 1126, 78 S. Ct. 1047 (1958). Respondent bears the burden of proving petitioner's liability as a transferee but not of proving ACT's liability for the tax. See sec. 6902(a); Rule 142(d).

The existence and extent of transferee liability is determined by the law of the State in which the transfer occurred -- in this case, Florida. See Commissioner v. Stern, supra at 45; Gumm v. Commissioner, 93 T.C. 475, 479-480 (1989), affd. *457 without published opinion 933 F.2d 1014 (9th Cir. 1991); Fibel v. Commissioner, 44 T.C. 647, 657 (1965).

Respondent argues that under Florida law, petitioner is liable as a transferee both at law and in equity. ⁷ On brief, respondent bases his arguments regarding petitioner's liability at law on Florida statutes that were not in effect at the time of the transfers in question. ⁸ We need not linger long over this complication, however, for as discussed below, we conclude that respondent has made a prima facie case of transferee liability in equity.

*458

Under Florida law, a transferee may be liable in equity for the debts of the transferor who fraudulently conveys assets to the transferee. See Hagaman v. Commissioner, 100 T.C. 180, 188 (1993); Schad v. Commissioner, 87 T.C. 609, 614 (1986), affd. without published opinion 827 F.2d 774 (11th Cir. 1987); Wiltzius v. Commissioner, T.C. Memo 1997-117. Under Florida's Uniform Fraudulent Transfer Act (UFTA), effective January 1, 1988, a transfer is fraudulent as to present and future creditors if the debtor made the transfer "With actual intent to hinder, delay, or defraud any creditor of the debtor". Fla. Stat. sec. 726.105(1)(a) (1988). The UFTA defines "creditor" as "a person who has a claim", and "debtor" as "a person who is liable on a claim." Fla. Stat. sec. 726.102(4), (6) (1988).

Petitioner concedes that he is precluded from challenging the tax liability of ACT as determined in Association Cable TV, Inc. v. Commissioner, supra. See Krueger v. Commissioner, 48 T.C. 824 (1967) (decisions entered by the Tax Court determining deficiencies against taxpayers are res judicata as to the taxpayers' liabilities*459 in a later action involving transferee liability). Petitioner does not dispute that respondent has failed to collect the liability from ACT. Petitioner does not dispute that he was an initial transferee of ACT and that as a result of the distributions of November 7, 1988, he received gross proceeds of $ 199,490. The critical question is whether ACT made the transfers to petitioner with fraudulent intent.

The UFTA specifies a number of factors that may be considered in determining whether the debtor made transfers, or incurred obligations, with intent to hinder, delay, or defraud a creditor. ⁹ Among these factors are: (1) Whether the transfer was to an insider; (2) whether the transfer was of "substantially all" the debtor's assets; (3) whether the debtor was insolvent or became insolvent shortly after the transfer was made; and (4) whether the transfer was made shortly before or after a substantial debt was incurred. Fla. Stat. sec. 726.105(2)(a), (e), (i), (j) (1988). As discussed below, all these factors indicate fraudulent intent in the instant case.

*460 1. WHETHER THE TRANSFER WAS TO AN INSIDER

In the case of a corporation, an "insider" includes a director or an officer of the corporation. Fla. Stat. sec. 726.102(7)(b) (1988). The parties have stipulated that petitioner was a shareholder, director, and officer of ACT. "In Florida, existing creditors have the benefit of a presumption of fraudulent intent where the conveyance is voluntary and there is a close relationship between the transferor and the transferee." Hagaman v. Commissioner, supra at 188; see Scott v. Dansby, 334 So. 2d 331, 333 (Fla. Dist. Ct. App. 1976). ¹⁰

*461    2. WHETHER THE TRANSFER WAS OF "SUBSTANTIALLY ALL" THE DEBTOR'S

ASSETS

Under the terms of the purchase agreement, ACT was to sell all its tangible and intangible assets to JSL. The sale resulted in a complete dissolution or liquidation of ACT's assets. After the sale, ACT conducted no other business, except for filing its 1988 Federal income tax return. On November 7, 1988, ACT distributed the cash proceeds from the sale to the shareholders. We conclude that on November 7, 1988, ACT transferred "substantially all" its assets to its shareholders. See General Trading, Inc. v. Yale Materials Handling Corp., 119 F.3d 1485, 1500 (11th Cir. 1997). ¹¹

*462    3. WHETHER THE DEBTOR WAS INSOLVENT OR BECAME INSOLVENT SHORTLY

AFTER THE TRANSFER WAS MADE

The parties have stipulated that ACT was rendered insolvent by ACT's sale of its assets to JSL on October 28, 1988, and ACT's subsequent transfer to its shareholders on November 7, 1988.

4. WHETHER THE TRANSFER WAS MADE SHORTLY BEFORE OR SHORTLY AFTER

A SUBSTANTIAL DEBT WAS INCURRED

ACT transferred assets to petitioner shortly after it sold its assets to JSL and shortly before it incurred the related tax liabilities. See Hagaman v. Commissioner, 100 T.C. at 188 (regardless of when Federal taxes are actually assessed, taxes are due and owing, and constitute a liability, no later than the date the tax return for the particular period is required to be filed); Yagoda v. Commissioner, 39 T.C. 170, 185 (1962) (transferee is liable for all existing debts of the transferor, "whether or not such debts had been determined, or were even known at that time"), affd. 331 F.2d 485 (2d Cir. 1964).

Although a single factor considered in isolation may not establish the requisite fraud to set aside a conveyance, several*463 of them considered together may afford a basis to infer fraud. See Johnson v. Dowell, 592 So. 2d 1194, 1197 (Fla. Dist. Ct. App. 1992). On the basis of the several factors discussed above, and after considering all the evidence in the record, we conclude that respondent has established a prima facie case that ACT made the transfers in question with fraudulent intent. Petitioner bears the burden of rebutting the presumption. See Hagaman v. Commissioner, supra at 189; Nau v. Commissioner, 27 T.C. 999, 1000-1001 (1957), affd. in part and revd. in part on another ground 261 F.2d 362 (6th Cir. 1958); Gobins v. Commissioner, 18 T.C. 1159, 1169 (1952), affd. per curiam 217 F.2d 952 (9th Cir. 1954); Advest, Inc. v. Rader, 743 F. Supp. 851, 854 (S.D. Fla. 1990).

On reply brief, petitioner states that he does not contest the receipt of $ 199,490 but argues that no more than $ 103,017 of this amount represents a transfer from ACT, because: (1) Petitioner had $ 13,873 of expenses associated with the sale of ACT's assets to JSL, and (2) $ 82,600 was paid to petitioner for his entering into a covenant not*464 to compete with JSL. ¹²

*465 1. CLAIMED SELLING EXPENSES

Petitioner argues that $ 13,873 of claimed selling expenses should be netted from the gross amounts transferred to him by ACT. The record is largely silent about these claimed selling expenses, who incurred them, when, or why. Petitioner's position here is inconsistent with his concession in Briggs v. Commissioner, T.C. Memo 2000-380, that the full $ 199,490 is includable in his gross income. In Briggs, petitioner did not claim any deduction or offset for the $ 13,873 of claimed selling expenses. As previously noted, petitioner has agreed to be bound by the record compiled in Briggs. Petitioner has failed to establish his entitlement to any offset for selling expenses here.

2. AMOUNTS ATTRIBUTABLE TO COVENANT NOT TO COMPETE

Petitioner argues that $ 82,600 of the transfers in question, representing one-fourth of the $ 330,400 initial payment from JSL with respect to the $ 500,000 agreed-upon consideration for the covenant not to compete, represents his own income rather than a transfer from ACT. We disagree.

The UFTA defines "Transfer", in relevant part, as "every mode, direct or indirect, * * * of disposing of or parting with an asset*466 OR AN INTEREST IN AN ASSET". Fla. Stat. sec. 726.102(12) (1988) (emphasis added). As a party to the covenant not to compete, ACT clearly had an interest in the proceeds therefrom, which the parties have stipulated were part of the total purchase price paid for ACT's assets. Petitioner has not established that ACT had no interest in the entire $ 330,400 partial payment it received from JSL, or that its transfer to petitioner of a one-fourth share of these proceeds did not constitute a transfer from ACT within the meaning of the UFTA.

WHETHER THE FULL AMOUNT OF ACT'S DEFICIENCY HAS BEEN PAID

On brief, petitioner argues for the first time that he should not be liable for ACT's deficiency because it has already been discharged by other transferees. Generally, we will not consider positions raised for the first time on brief if to do so would prejudice the opposing party. See Leahy v. Commissioner, 87 T.C. 56, 64-65 (1986). In the instant circumstances, however, we believe it is appropriate to address petitioner's argument.

As a general principle, the Commissioner can collect the transferor's tax liability only once; where it is shown that the full amount of the deficiency*467 has been paid, the liability of the transferee is extinguished. See Holmes v. Commissioner, 47 T.C. 622, 627 (1967); Quirk v. Commissioner, 15 T.C. 709 (1950), affd. per curiam 196 F.2d 1022 (5th Cir. 1952). Once the Commissioner has met his burden of proof under section 6902(a) and established a prima facie case for transferee liability, the burden of going forward devolves upon the transferee to establish defenses thereto, such as payment of the transferor's liability by or on behalf of the transferor. See Estate of McKnight v. Commissioner, 8 T.C. 871, 873 (1947); Newsome v. Commissioner, T.C. Memo 1976-75.

On brief, petitioner states without elaboration that he "has * * * learned that the Estate of Gay has also paid its liability emanating from the Associated [sic] Cable TV, Inc. distribution." The record is devoid of evidence, however, of any such payment by the Estate of Gay, or when, how, or for what purpose it might have been made.

Daniell testified that he has paid approximately $ 113,000 in satisfaction of a transferee liability claim asserted against him by the Internal Revenue Service (IRS). Assuming*468 arguendo that Daniell made this payment, it is insufficient to satisfy the full amount of ACT's liability. ¹³ Moreover, so long as the possibility exists that Daniell could file for a refund, petitioner cannot be exonerated from transferee liability. See Holmes v. Commissioner, supra; Peterson v. Commissioner, T.C. Memo 1972-65. Barring refund claims by Daniell or other transferees who may have made payments against ACT's tax liability, however, we expect respondent to take any such payments into account in computing petitioner's ultimate liability. See Peterson v. Commissioner, supra.

*469 TRANSFEREE LIABILITY FOR ADDITION TO TAX FOR FRAUD

On brief, petitioner argues that because respondent has failed to prove petitioner's fraud with clear and convincing evidence, petitioner has no transferee liability for ACT's addition to tax for fraud. Petitioner's argument betrays a fundamental misunderstanding of transferee liability. Section 6901 provides the Commissioner a mechanism for collecting a transferor's tax liability, which may be either as to the amount of tax shown on the transferor's return or as to any deficiency or underpayment of tax by the transferor. See sec. 6901(b). The additions to tax, such as the section 6653(b) addition to tax for fraud, are assessed and collected in the same manner as taxes, and the term "tax" as used in the Internal Revenue Code specifically includes, among other things, the section 6653(b) addition to tax for fraud. Sec. 6662(a).

Accordingly, petitioner's liability as a transferee of ACT extends to ACT's liability for the addition to tax for fraud as determined in Association Cable TV, Inc. v. Commissioner, T.C. Memo 1995-596. See Bowlin v. Commissioner, 31 T.C. 188 (1958), affd. per curiam 273 F.2d 610 (6th Cir. 1960).*470

STATUTE OF LIMITATIONS

Petitioner argues that respondent is time barred from asserting liability against petitioner as a transferee.

A transferee's liability, at law or in equity, for Federal income tax generally must be assessed and collected in the same manner as the transferor's liability. See sec. 6901(a)(1)(A)(i). In the case of the liability of an initial transferee, however, the statute of limitations extends 1 year after the limitations period for assessing tax against the transferor. See sec. 6901(c). Petitioner concedes that he is an initial transferee of ACT.

As a general rule, the limitations period for assessing taxes against the transferor is 3 years from the date the return is filed. See sec. 6501(a). In the case of a false or fraudulent return with the intent to evade tax, however, the general rule is inapplicable, and the IRS may assess or collect the tax anytime. See sec. 6501(c)(1); DiLeo v. Commissioner, 96 T.C. 858, 880 (1991), affd. 959 F.2d 16 (2d Cir. 1992).

This Court previously has determined that ACT is liable for the addition to tax for fraud with respect to taxable year 1988. See Association Cable TV, Inc. v. Commissioner, supra.*471 This holding is conclusive that at least part of the deficiency was attributable to fraud; consequently, ACT's 1988 Federal income tax return was false and fraudulent. See Forehand v. Commissioner, T.C. Memo 1993- 618. On brief, petitioner concedes that he is collaterally estopped from challenging the decision in Association Cable TV, Inc. Accordingly, because no statute of limitations bars assessment against ACT, none bars assessment against petitioner. See Pert v. Commissioner, 105 T.C. 370, 378 (1995); Bartmer Automatic Self Serv. Laundry v. Commissioner, 35 T.C. 317, 322 (1960).

Petitioner argues that the Florida limitations period is applicable and bars respondent from proceeding against petitioner. Petitioner's argument is without merit. "It is well settled that the United States is not bound by state statutes of limitation * * * in enforcing its rights." United States v. Summerlin, 310 U.S. 414, 416, 84 L. Ed. 1283, 60 S. Ct. 1019 (1940); see United States v. Fernon, 640 F.2d 609, 612 (5th Cir. 1981) (Florida statute of limitations did not apply); United States v. West Tex. State Bank, 357 F.2d 198, 201 (5th Cir. 1966); Bresson v. Commissioner, 111 T.C. 172, 184 (1998),*472 affd. 213 F.3d 1173 (9th Cir. 2000). Although State law determines the nature and extent of property rights in applying a Federal revenue act, Federal law determines the consequences of those rights. See United States v. National Bank of Commerce, 472 U.S. 713, 722-723, 86 L. Ed. 2d 565, 105 S. Ct. 2919 (1985); Bresson v. Commissioner, 111 T.C. at 189.

Accordingly, we hold that respondent is not time barred from assessing transferee liability against petitioner.

CONCLUSION

Petitioner is liable as a transferee for ACT's income tax deficiencies and additions to tax up to, but not exceeding, $ 199,490, plus interest, for the tax liabilities due and uncollected from ACT for the 1988 taxable year. ¹⁴

*473 To reflect the foregoing,

Decision will be entered under Rule 155.