Executive who purchased acquiring corporation's stock at nominal price was liable for unpaid taxes as transferee.

• Author: Scott, Thomas H.

T was 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...