Executive Who Purchased Acquiring Corporation's Stock at Nominal Price Was Liable for Unpaid Taxes as Transferee

Twas a director and officer of the MSSTA Corporation, and owned 48% of its stock; C owned the other 52%. In 1989, T began discussing the possibility of merging MSSTA with its primary competitor, the AST Corporation. As a result of discussions, the two companies determined that the transaction would need to be structured as an asset acquisition, so that the acquiring company would not be responsible for the liabilities of the target.

Originally, AST was willing to pay $800,000 for MSSTA's assets; however, such a transaction would result in a taxable capital gain for T. To accommodate T and avoid this tax, the transaction was structured as a sale of the assets for $300,000, with a consulting and noncompetition agreement with C. In addition, T would purchase 21% of AST's stock for 10 cents per share, in exchange for his promise to guarantee a bank loan for AST.

On their 1989 returns, MSSTA reported a $300,000 sale of its assets and T reported no liquidating dividends.

In 1991, the IRS audited MSSTA's 1989 return. Ultimately, the Service, MSSTA, AST and T entered into a closing agreement, in which they agreed that MSSTA would realize an $800,000 gain on the transaction, resulting in an unpaid tax liability of $165,000. Because MSSTA had no assets or income with which to pay this amount, the IRS sought payment from T as a transferee liable under Sec. 6901.

T challenged this assessment, but the Tax Court, in a memorandum decision, held for the Service. The Court of Appeals (opinion McKay, J.) affirms, holding T liable under his state's fraudulent conveyance law.

Sec. 6901 authorizes the IRS to collect taxes from parties to whom assets were transferred. Accordingly, the Service has attempted to collect MSSTA's outstanding liability from T. Although Sec. 6901 provides a procedural mechanism with which the IRS can assess transferee liability, it does not define substantive liability. Rather, state law determines whether a person is liable as a transferee of assets. T asserts that, as a matter of law, he cannot be considered a Sec. 6901 transferee, because he did not receive any assets directly from MSSTA. In advancing this argument, he relies primarily on Vendig, 229 F2d 93 (2d Cir. 1956).

It is undisputed that T received stock directly from AST and that the transaction was structured so that he received no distributions from MSSTA. In Vendig, the Second Circuit held that a similarly situated shareholder was not a transferee. When the vendee issues its stock directly to the shareholders, that stock never became a part of the vendor's assets. Instead, these assets became the property of the vendee corporation when the vendor ceased to exist. The court acknowledged that this holding could allow the parties (under some circumstances) to vary the tax consequences according to the manner in which a reorganization is conducted, but held that this did not affect the amount of the tax or the availability of property to satisfy it. In contrast, the structure of T's transaction did affect the tax owed, and analysis of that distinction leads us to a different conclusion.

A necessary basis for the Vendig holding was that the stock exchange was for shares of equal value and that the exchange was pursuant to an agreement independent of the sale of company assets. Conversely, T's stock exchange was not extraneous but contingent on the sale of company assets. In fact, his stock exchange constituted a portion of the total consideration paid for those assets, thus affecting the tax consequences. Additionally, the stock T acquired was not purchased by reference to the stock value of his MSSTA shares, but were instead purchased for a nominal price of 10 cents per share. This arrangement leaves room for doubt as to whether T acquired an interest of equal value.

Reviewing a different type of transaction structure, the Vendig court was comfortable that the shareholder did not receive (directly or indirectly) property belonging to the vendor. In light of the stipulated agreement in this case, in which T agreed that he received property, a portion of which represented partial consideration paid to MSSTA, we must reach the opposite conclusion. We hold that T received assets, although indirectly, from the company that was later assessed with a tax liability.

The Service's authorization to collect taxes under Sec. 6901(a)(1)(A) extends to income tax liability (at law or in equity) of a transferee of property. The statute expressly includes a "distributee" of assets as a contemplated transferee. Regs. Sec. 301.6901-1(b) clarifies that the term distributee includes "the shareholder of a dissolved corporation."

T's stipulation that he, a shareholder, received a portion of the consideration paid for the purchase of MSSTA assets places him squarely within the broad parameters of Sec. 6901.

We must then turn to the applicable state law to define his substantive liability. Colorado law includes at least three possible sources for transferee liability: a liquidation statute, a redemption statute or a fraudulent conveyance statute. Under Colorado law, a conveyance is fraudulent when it is "made with the intent to hinder, delay, or defraud creditors," in this case, the IRS. Fraudulent intent is a question of fact. The Tax Court concluded that, under this fraudulent conveyance statute, the stock transfer was made to T with the intent to hinder, delay or defraud the Service. T asserts that he had no intent to defraud because he did not know that an additional tax liability might incur. While structuring the deal, T obtained multiple opinions on foreseeable tax consequences. Having reviewed the record, the evidence is sufficient to support the finding that T, informed by those opinions and by his corporate acumen, knowingly chose to take a calculated risk.

Thomas H. Scott, 10th Cir., 1/4/01, aff'g TC Memo 1998-426