118 T.C. No. 4
UNITED STATES TAX COURT
LARRY D. JOHNSON, TRANSFEREE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14096-99. Filed January 24, 2002.
R determined that P was liable as a transferee of assets from C and, therefore, was liable for C’s tax liabilities. P was the 100-percent owner and president of C. The transfer to P was from a settlement that P, C, and C’s subsidiaries had reached with a creditor. P contends that the portion he received was in consideration of his releasing a claim of his own against the creditor for damages to business reputation, so that, in effect, there was no transfer from C. R contends that the settlement belonged to the corporate entities and that P was a transferee.
If it is decided that the transfer was of C’s asset to P, then P contends in the alternative that the transfer was made for adequate consideration so that sec. 6901, I.R.C. would be inapplicable. R contends that under Texas law, because P was considered an “insider”, the transfer to him was in avoidance of creditors. P contends that he comes within an exception to the rule relating to “insiders”. The exception involves circumstances where the transfer to - 2 -
the “insider” was made as part of the usual business practices of the “insider” and the transferor.
Held: The transfer to P was from C. Held, further, even though P was an “insider” under Texas law, the transfer was not in avoidance of creditors because it was made in good faith and as part of the usual business practices of P and C. Held, further, P is not liable as a transferee.
Gerald R. Mace and Ben D. Stevens, for petitioner.
Nancy Graml, for respondent.
GERBER, Judge: In a notice of liability, respondent
determined that petitioner is liable as a transferee at law and
in equity for the assessed Federal income tax liability and
additions to tax of Johnson Consolidated Cos., Inc., and
Subsidiaries (JCC), for its taxable year ending June 30, 1989.
Respondent determined that petitioner is liable for JCC’s income
tax liability of $57,004.00 and additions to the tax in the
amounts of $12,825.90 and $14,251.00 under section 6651(a)(1)1
and (2), respectively.
There is no dispute concerning JCC’s liability for the
deficiency. The issue for our consideration is whether
petitioner is liable as a transferee for JCC’s unpaid Federal
income tax, additions to tax, and accrued interest. If
1 Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years in issue, and Rule references are to the Tax Court Rules of Practice and Procedure. - 3 -
petitioner is liable as a transferee, then we must decide the
applicable date on which interest began to accrue.
FINDINGS OF FACT2
JCC was incorporated in 1985 under the laws of the State of
Texas and was in the business of developing real estate. Larry
D. Johnson (petitioner) was the president, registered agent, sole
director, and sole shareholder of JCC and is statutorily deemed
to be an “insider” under Texas law. At the time the petition
herein was filed, petitioner resided in Houston, Texas.
From 1985 to 1992, JCC was involved in more than 20 real
estate projects. The following companies were wholly owned
subsidiaries of JCC: LDJ Construction Co.; LDJ Development Co.;
Parklane Development Corp.; Rialto Development Corp.; The Johnson
Corp.; Forest Homes, Inc.; Hearthstone Development Corp.; The
Johnson Development Corp.; and Larry D. Johnson Interests, Inc.
In 1985, LDJ Development Co. entered into a joint venture
with the Brentwood Co. called the West Mill Joint Venture (West
Mill). West Mill was formed in order to purchase and develop
Towne Lake, a 3,300-acre real estate project in Cherokee County.
In 1986, LDJ Construction Co. purchased Brentwood’s 50-percent
interest in West Mill by means of a note payable to Brentwood in
the amount of $709,560.
2 The stipulation of facts, supplemental stipulation of facts, and the exhibits attached thereto are incorporated herein by this reference. - 4 -
In 1987, West Mill entered into a $52,500,000 construction
loan agreement with Westinghouse Credit Corp. (Westinghouse).
Under the agreement, petitioner and JCC each guaranteed 50
percent of the Westinghouse loan, and petitioner was required to
execute all documents individually and in his capacity as a
corporate representative of JCC (shareholder/president).
During 1991, West Mill defaulted on the loan, and the payment
obligations of West Mill were accelerated. On October 4, 1991,
petitioner spoke with a representative of Westinghouse regarding
a proposed settlement to resolve the default situation. A letter
confirming petitioner’s conversation contained the following
proposals:
(i) West Mill will provide [Westinghouse] with a deed to Towne Lake in lieu of foreclosure;
(ii) Johnson Consolidated Companies (guarantor of the Towne Lake loan and controlling stockholder of both West Mill venturers) will enter into a consulting agreement with [Westinghouse] and provide consulting services related to the operation and development of Towne Lake in exchange for consulting fees approximating One Million Fifty Thousand Dollars ($1,050,000) on terms to be mutually agreed upon.
On December 5, 1991, a settlement agreement regarding the
Westinghouse loan was entered into between Westinghouse, West
Mill, petitioner, JCC, LDJ Development Co., and LDJ Construction
Co. Throughout the settlement negotiations petitioner acted in a
dual capacity on his own behalf as a guarantor of the
Westinghouse loan and as a representative of the West Mill - 5 -
venturers and their parent JCC.
Pursuant to the settlement agreement, West Mill conveyed all
of its rights in the Towne Lake project to First Hotel Investment
Corp., an affiliate of Westinghouse. Additionally, West Mill,
petitioner, JCC, LDJ Construction Co., and LDJ Development Co.
released any and all claims against Westinghouse. In return,
Westinghouse released any and all claims, agreed not to foreclose
on the Towne Lake property, and paid $1,050,000 jointly to West
Mill, petitioner, JCC, LDJ Construction Co., and LDJ Development
Co. The agreement did not specify to whom the $1,050,000 would
be distributed.
On December 5, 1991, the $1,050,000 payment was received by
JCC and on December 6, 1991, was deposited into a bank account
opened by JCC to receive the $1,050,000 payment. Petitioner
directed JCC to pay certain creditors of West Mill from the bank
account. Of the $1,050,000 received from Westinghouse, JCC paid
$269,000 to the Johnson Corp. for management fees it earned in
conjunction with West Mill, and $492,442 to F. Gardner Parker,
Trustee.
On January 9, 1992, petitioner submitted a request to JCC
for payment to him of the remainder of the settlement fund
($286,737.27). Petitioner’s payment request contained no
explanation or reason for the requested transfer. On or about
January 10, 1992, petitioner deposited the $286,737.27 payment - 6 -
received from JCC into his personal bank account. JCC booked the
transferred amount as an amount payable from petitioner. At the
time petitioner received the transferred amount JCC was insolvent
and had not filed its U.S. Corporation Income Tax Returns for its
fiscal tax years ended June 30, 1986, 1987, and 1989,
respectively.
Although petitioner was aware that JCC was insolvent, he
believed that JCC’s net operating losses would result in no
Federal tax liability for JCC. It was usual for petitioner to
advance or loan funds to JCC and/or its subsidiaries. Prior to
receiving the $286,737.27 from JCC, there had been regular
advances and repayments of funds between JCC and petitioner.
Petitioner’s Income Tax Returns
On his 1991 Form 1040, U.S. Individual Income Tax Return,
petitioner reported interest income from the Johnson Corp., in
the amount of $25,924. That amount represented interest on
obligations owed to him by the Johnson Corp. On his 1992
individual Federal income tax return, petitioner also reported
wages from JCC’s subsidiaries (the Johnson Corp. and Heritage
Development Co.) in the amounts of $50,000 and $56,250,
respectively. Petitioner’s reported income of $304,637 did not
include the $286,737.27 received from JCC.
Tax Liability of JCC
JCC’s corporate income tax return, for its fiscal tax year - 7 -
ended June 30, 1989, was filed on October 3, 1994. JCC reported
taxable income, before net operating losses (NOLs), in the amount
of $2,858,914. After applying carryover NOLs from prior tax
years, JCC had no regular corporate income tax liability. JCC,
however, remained liable for the alternative minimum tax of
$57,004, which is in controversy in this case. The unpaid tax
liability reported on JCC’s return was assessed by the
Commissioner on November 14, 1994. In addition, the Commissioner
assessed a $12,825 late filing penalty and a $14,251 penalty for
late payment of tax, plus interest as provided by law. During
February 1995, the Commissioner filed a notice of Federal tax
lien against JCC for its 1986 tax liabilities.
OPINION
We consider, under section 6901, whether respondent has
shown that petitioner is a transferee of JCC’s assets and, hence,
liable for JCC’s unpaid Federal tax liability. Section 6901(a)
is a procedural statute enabling respondent to collect a
transferor’s unpaid tax liability from a transferee of the
transferor’s assets. Under section 6901(a), respondent may
establish transferee liability if a basis exists under applicable
State law for holding the transferee liable. Commissioner v.
Stern, 357 U.S. 39, 42-47 (1958); Bresson v. Commissioner, 111
T.C. 172, 179 (1998), affd. 213 F.3d 1173 (9th Cir. 2000);
Hagaman v. Commissioner, 100 T.C. 180, 183 (1993), affd. and - 8 -
remanded 958 F.2d 684 (6th Cir. 1992). Respondent bears the
burden of proving that petitioner is liable as a transferee of
the taxpayer. Sec. 6902(a); Gumm v. Commissioner, 93 T.C. 475,
479 (1989), affd. without published opinion 933 F.2d 1014 (9th
Cir. 1991).
Respondent determined that petitioner is a transferee at law
and in equity. Petitioner asserts two different defenses in this
case in an attempt to avoid transferee liability. First,
petitioner contends that the portion of the settlement proceeds
transferred to him was his asset and that JCC was merely a
conduit or recipient of the settlement proceeds for purposes of
convenience. In other words, petitioner contends that the
portion of the settlement proceeds received by him was not an
asset of JCC or its subsidiaries and, accordingly, could not be
“transferred” to him. Second, if we find that the proceeds
belonged to the JCC conglomerate and that they were then
transferred to petitioner, petitioner, in the alternative,
contends that the transfer was for adequate consideration.
Petitioner further contends that one of the JCC entities had an
antecedent obligation to petitioner and that the transfer
satisfied that obligation. We note that the question of
transferee liability in this case is to be decided under the law
of the State of Texas.
The first element about which the parties disagree concerns - 9 -
whether there was a transfer of property; i.e., whether the
property received by petitioner was from JCC (JCC’s property as
opposed to being due petitioner from the Westinghouse
settlement). If the property was, in fact, JCC’s, then we must
decide whether there was adequate consideration for the transfer
to petitioner.
The laws of the State of Texas provide for transferee
liability under a modified form of the Uniform Fraudulent
Transfer Act (TUFTA). TUFTA provides that a transferor engages
in a transfer that is fraudulent as to a creditor if: (1) The
transferor makes a transfer to a transferee; (2) the creditor has
a claim against the transferor before the transfer is made; (3)
the transferor makes the transfer without receiving reasonably
equivalent value; and (4) the transferor is insolvent at the time
of the transfer or is rendered insolvent as a result of the
transfer. Tex. Bus. & Com. Code Ann. sec. 24.006(a) (Vernon
1987); Hanna v. Commissioner, T.C. Memo. 1999-292.
If all four elements of TUFTA section 24.006(a) are present,
a creditor of the transferor (i.e., respondent) may recover from
the transferee an amount equivalent to the lesser of the amount
of the assets transferred to the transferee (reduced by the
amount of assets or rights received by the transferor on the
transfer, if any) or the amount of the creditor’s claim. Tex.
Bus. & Com. Code Ann. sec. 24.009(b), (d). If transferee - 10 -
liability is established under State law, the transferee is
liable for the transferor’s taxes due as of the time of the
transfer, as well as interest and any additions to tax, to the
extent of the value of the assets transferred. See Estate of
Glass v. Commissioner, 55 T.C. 543, 575 (1970), affd. 453 F.2d
1375 (5th Cir. 1972).
Petitioner argues that there was no transfer of property
from JCC.3 Petitioner maintains that the $286,737.27 he received
from JCC was property he was entitled to receive directly from
Westinghouse. Petitioner contends that $286,737.27 of the
$1,050,000 settlement payment was in exchange for any claim
petitioner may have had against Westinghouse. Specifically,
petitioner asserts, in the context of this case, that
Westinghouse damaged his business reputation and rendered him
unable to borrow funds.
Petitioner’s factual assertions are not supported by the
record. There is no evidence that the settlement agreement was
entered into to protect Westinghouse from a possible legal action
by petitioner in his individual capacity. Prior to the default
on the Westinghouse loan, JCC performed consulting duties in
3 For purposes of this legal discussion, references to “JCC” are to JCC, the parent corporation, and all of JCC’s wholly owned subsidiaries. We note that their returns were consolidated, and, hence, the disputed tax liability is consolidated. Factually and legally, there is no meaningful distinction to be made between any of the corporate entities linked by ownership to JCC or petitioner. - 11 -
connection with West Mill. In the negotiations preceding the
settlement agreement, petitioner proposed to a representative of
Westinghouse that Westinghouse pay JCC consulting fees of
$1,050,000 for services related to Towne Lake. His proposal to
that effect is confirmed in a October 7, 1991, letter to
petitioner that, in pertinent part, contains the following
statement:
This letter will confirm our conversation * * * with respect to a proposed settlement agreement between Westinghouse Credit Corporation (“WCC”) and West Mill Joint Venture (“West Mill”) regarding the New defaulted loans made in connection with the Towne Lake development in Georgia (“Towne Lake”).
WCC understands your proposal to be as follows:
(i) West Mill will provide WCC with a deed to Towne Lake in lieu of foreclosure;
(ii) Johnson Consolidated Companies (guarantor of the Towne Lake loan and controlling stockholder of both West Mill venturers) will enter into a consulting agreement with WCC and provide consulting services related to the operation and development of Towne Lake in exchange for consulting fees approximating One Million Fifty Thousand Dollars ($1,050,000) on terms to be mutually agreed upon. [Emphasis added.]
The settlement agreement, which mimics the above-quoted
letter, provides for West Mill to convey the Towne Lake deed to
Westinghouse in lieu of foreclosure and for Westinghouse to pay
$1,050,000 directly to JCC. There is no additional language in
the agreement delineating or explaining the reason for the
payment or the entities or individuals to whom the $1,050,000 was - 12 -
to be distributed.
In that same vein, upon receipt, the entire $1,050,000 was
deposited into JCC’s bank account that was established for the
sole purpose of receiving and, ultimately, distributing the
settlement proceeds. Of the $1,050,000 received from
Westinghouse, JCC paid $269,000 to The Johnson Corp. for
management fees earned in conjunction with West Mill and $492,442
to F. Gardner Parker, Trustee. JCC transferred the remaining
$286,737.27 to petitioner and recorded the transfer in its books
as a payable due from petitioner.4 Mr. Boswell, who had been
working closely with petitioner as treasurer of The Johnson Corp.
at the time of the settlement agreement, testified that JCC
considered the $1,050,000 received from Westinghouse to be income
to JCC. Likewise, JCC reported the $1,050,000 as income on its
1991 corporate income tax return.
Petitioner’s contention that his individual participation in
the settlement agreement is conclusive evidence of his rights to
a portion of the settlement is unfounded. The JCC corporations
entered into the settlement agreement to resolve claims
concerning the outstanding and defaulted debt owed to
Westinghouse. Petitioner was named as a party to the agreement
in his individual capacity because he was a guarantor of the
loan. The agreement identified and released petitioner as a
4 A nominal portion of the amount was used for administrative expenses. - 13 -
guarantor. It is obvious that if petitioner had not been a party
to the agreement, he would have remained liable to Westinghouse
for 50 percent of the unpaid debt and/or future claims by
Westinghouse. Accordingly, we hold that the $1,050,000
settlement was JCC’s property and that JCC transferred a payment
of $286,737.27 to petitioner. Having decided that a transfer
from JCC to petitioner occurred, we must now decide whether the
transfer was for adequate consideration.
We now consider, under Texas law, whether JCC received
reasonably equivalent value amounting to adequate consideration
for the amount transferred. See Tex. Bus. & Com. Code Ann. sec.
24.006(a) (West 1987); Gumm v. Commissioner, 93 T.C. at 480.
Respondent argues that petitioner received the transferred
amount without consideration or for less than adequate
consideration. Petitioner argues that he was owed an antecedent
debt and that the $286,737.27 payment was received in
satisfaction of that debt. A transfer that would otherwise
result in transferee liability under section 6091(a) may be
excepted from liability if the transfer was made for adequate
consideration. See Gumm v. Commissioner, supra. A similar
exception exists under TUFTA where the transferor receives
“reasonably equivalent value” in exchange for the transfer. See
Tex. Bus. & Com. Code Ann. sec. 24.006(a) (West 1987).5 Under
5 “Reasonably equivalent value” includes a transfer that is within the range of values for which the transferor would have (continued...) - 14 -
Texas law, payment in satisfaction of an antecedent debt may be
adequate consideration in order to avoid transferee liability.
Respondent argues that the record does not contain
documentary evidence of a debt.6 However, the preponderance of
the evidence shows that, at the time of the transfer, there was a
debt due petitioner from JCC.
Petitioner testified that he regularly advanced and received
funds from his corporations. Petitioner’s uncontroverted
testimony, was supported by the testimony of other witnesses.
Mr. Boswell testified that petitioner regularly advanced money to
the corporation(s) to meet payroll and vendor obligations. The
testimony of Mr. Boswell was also uncontroverted.
In addition, documents in the record support and corroborate
petitioner’s testimony and that of Mr. Boswell. JCC reported
shareholder loans due to petitioner in returns of prior years,
including the years ending June 30, 1988, and 1989. Most
significantly, petitioner reported $25,924 of imputed interest
income from the corporation(s) on his 1991 individual income tax
return. On that point, Mr. Boswell testified that “there were no
5 (...continued) sold the asset in an arm’s-length transaction. The Texas UFTA includes in its definition of “value” an antecedent debt that the transfer satisfies. 6 Respondent contends that his burden was satisfied because of petitioner’s failure to offer documentary evidence of debt. That contention alone would not make a prima facie showing with respect to transferee liability. Ultimately, this issue has evolved into a factual and legal dispute about whether there was adequate consideration for the transfer. - 15 -
notes created, but that interest income was imputed by the CPAs
that prepared the returns on these due to/due from accounts.”
Respondent counters petitioner’s argument by noting that the
$286,737.27 payment or transfer came from JCC and not the Johnson
Corp., the subsidiary of JCC to which petitioner had advanced
funds. JCC, however, was merely a holding company, and the
Johnson Corp. and the other consolidated subsidiaries of JCC were
the operating companies through which the corporate business was
transacted. Significantly, the asserted transferee liability is
for the consolidated JCC group, another factor that militates
against respondent’s argument.
Finally, it appears that the amount of interest income
reported by petitioner quantitatively supports a $286,737.27 debt
due to petitioner. If, for example, the $25,924 of interest
income represented an interest rate of 10 percent, the amount due
to petitioner would approximate $286,737.27.
On this record, petitioner has shown that there was a debt
due him from the JCC corporation(s) at the time of the transfer.
With that finding, we next consider whether the satisfaction of
that debt due petitioner was “adequate consideration.”
Under Texas law, “value” is given for a transfer if, in
exchange for the transfer, property is transferred or an
antecedent debt is satisfied. Tex. Bus. & Com. Code Ann. sec.
24.006(a)(Vernon 1987). Respondent argues that, even if JCC’s
payment satisfied an antecedent debt in an amount that was - 16 -
reasonably equivalent to the transfer, as a matter of law the
transfer was fraudulent under TUFTA section 24.006(b).
TUFTA provides that a transfer is fraudulent as to an
insider who is also a creditor. In addition, if the creditor’s
antecedent debt arose before the transfer was made, the debtor
was insolvent at the time, and the insider had reasonable cause
to believe that the debtor was insolvent, then the transfer is
fraudulent as a matter of law. Tex. Bus. & Com. Code Ann. sec.
24.006(b)(Vernon 1987).
It is factually established in this case: That petitioner
was an “insider” under Texas law; that JCC was insolvent at the
time of the transfer; and that the transfer satisfied an
antecedent debt. Respondent contends that petitioner knew of
JCC’s insolvency prior to the transfer so that the transfer was
made in bad faith and represents the kind and type of “insider
preference” that Tex. Bus. & Com. Code Ann. section 24.006(b) was
designed to obviate.
Petitioner counters that section 24.009(f) provides for a
statutory defense or exception to subsection (b). That exception
occurs where a transfer was made in good faith in the “ordinary
course of business or financial affairs” of the transferor/debtor
and the insider. Tex. Bus. & Com. Code Ann. sec. 24.006(f)(2)
(Vernon Supp. 2000).
In this case, although the transfer facially appears to meet
the statutory threshold for an insider preference under section - 17 -
24.006(b), it is nevertheless a “good faith” transfer under Texas
law, because it was part of the usual business practices of JCC
and petitioner. Petitioner has shown by corroborated and
uncontroverted evidence that the making of advances by petitioner
for the corporation’s payroll and vendor costs was part of the
usual and regular business practice between the corporations and
himself. Accordingly, we hold that petitioner is not a
transferee.
We have considered all other arguments advanced by the
parties, and to the extent that we have not addressed these
arguments, we consider them irrelevant, moot, or without merit.
To reflect the foregoing,
Decision will be entered for
petitioner.