Wednesday, October 31, 2012

Payments to Former Owner Not Disguised Purchase Price Payments

Payments to the former owner of an insurance brokerage business were not disguised purchase price payments, the U.S. Tax Court held Oct. 15 (H&M Inc. v.Commissioner, T.C., No. 16612-09, T.C. Memo. 2012-290, 10/15/12).  

The owner of H&M Inc., a small corporation, sold its insurance brokerage business to a bank, then went to work for the bank, which paid wages to H&M Inc. and interest payments to Harold Schmeets.

Holmes said both parties were “genuinely interested in creating an employment relationship and were not just massaging the paperwork for its tax consequences.”  There was virtually no discussion about the tax consequences of the transaction and the parties treated the transaction as an asset sale and employment relationship. 

The Court found that the payments Schmeets received under the employment and salary-deferment agreements were not disguised purchase-price payments to H & M. H & M is therefore not liable for the section 6662(a) penalty on this issue.  

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1 comment:

  1. What is it that interested you about this case. Pretty clearly on the facts there was a lot of personal goodwill as opposed to corporate goodwill IMHO.
    What kept me going on reading was the diversion of "corporate opportunity doctrine" prospects which never came up. Did the "officer" take unto himself a corporate opportunity? Maybe not on this case's facts, but you should find the doctrine interesting nonetheless. Had the patents become valuable, who would have owned the patents and/or rights to exploit the patents.
    Enjoy the thinking.
    --2003 TNT 145-33 ASSIGNMENT OF CORPORATE OPPORTUNITIES -- THE MIGRATION OF INTANGIBLES. (Section 951 -- Controlled Foreign Corporations) (Release Date: JULY 25, 2003) (Doc 2003-17546 (18 original pages)) CODE: Section 951 -- Controlled Foreign Corporations,
    R. Hardy, McDermott, Will & Emery, examines whether corporate inversions should be freely transferable.

    SUMMARY: Published by Tax AnalystsTM, David R. Hardy is a partner with McDermott, Will & Emery, New York. Laura Blasberg, an associate in the New York office of McDermott, Will & Emery, assisted in the preparation of portions of this report. This report was delivered to the New York City Tax Club on May 21, 2003. In the context of the inversion debate, many argued that corporate opportunities could be freely assigned to foreign affiliates without any tax consequences. However, future profit- making opportunities are the most consistent product Americans create. In this report, Hardy examines whether that value is freely transferable under current tax law, and if so, whether it should it be.
    In Central Railway Signal Co. v. Longden, (CA 7, 1952) 194 F.2d 310, a very good diversion of corporate opportunity case, the court said, there can be little question as to the law generally covering the actions of officers and directors of corporations with reference to the diversion of corporate opportunities. Further, the court said, it cannot be denied that Longden occupied a fiduciary position and owed an obligation to ... [his employer] to develop [a business] opportunity for it and in its behalf, and to refrain from doing anything that might work injury to his beneficiary or deprive it of profit or advantage which his skill, knowledge and ability might personally bring to it or enable it to realize in the reasonable exercise of its power. Citing, Pepper v. Litton, supra; Guth v. Loft, Inc., 23 Del. Ch. 255, 5 A.2d 503 (1939), at page 512; Durfee v. Durfee & Canning, Inc., 323 Mass. 187, 80 N.E.2d 522 (1948).

    The general principles of the law pertaining to corporate opportunity are settled in this state (Delaware). Guth v. Loft, 23 Del. Ch. 255, 5 A.2d 503, 510. Speaking for the (Delaware) Supreme Court, Chief Justice Layton said:

    "It is true that when a business opportunity comes to a corporate officer or director in his individual capacity rather than in his official capacity, and the opportunity is one which, because of the nature of the enterprise, is not essential to his corporation, and is one in which it has no interest or expectancy, the officer or director is entitled to treat the opportunity as his own, and the corporation has no interest in it, if, of course, the officer or director has not wrongfully embarked the corporation's resources therein . . . "On the other hand, it is equally true that, if there is presented to a corporate officer or director a business opportunity which the corporation is financially able to undertake, is, from its nature, in the line of the corporation's business and is of practical advantage to it, is one in which the corporation has an interest or a reasonable expectancy, and, by embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation, the law will not permit him to seize the opportunity for himself."
    Guth v. Loft, supra, 23 Del. Ch. 277, 5 A.2d 513.

    Posted by Paul A. Studly, Esq