The Court of Appeals of Tennessee recently ruled that a shareholder can be held liable for the unpaid franchise and excise taxes owed by a dissolved corporation. In Bookstaff v. Gerregano, the Court of Appeals of Tennessee ruled in favor of the Tennessee Department of Revenue (Department) and held that the statute of limitations did not bar collection of the unpaid franchise and excise taxes, that the Department could collect the taxes assessed against a dissolved corporation from a shareholder, and that a personal liability of a shareholder for franchise and excise taxes did not require a fraudulent conveyance from the corporation to its shareholder.
Blake Bookstaff was a shareholder of popularcategories.com (PopCat), a Florida corporation that he formed with another individual in 2000. In 2001, PopCat joined with another company to form Popular Enterprises, LLC, a Florida LLC. Bookstaff managed parts of popularcategories.com and Popular Enterprises, LLC from his place of business in Tennessee. Bookstaff became the sole shareholder of PopCat in 2005, and Popular Enterprises was sold in 2006 to a third party. The proceeds of the sale were paid to PopCat in 2006 and 2007 and were distributed to Bookstaff as the sole shareholder. In 2007, PopCat filed articles of dissolution in Florida.
The Department determined that the proceeds from the sale of Popular Enterprises were business earnings to PopCat, and that PopCat was subject to franchise and excise taxes in 2006 and 2007. In 2008 and 2009, the Department issued notices of assessment to PopCat for these unpaid franchise and excise taxes, plus penalties and interest. In 2009, PopCat filed suit to contest these assessments, and the Department filed counterclaims to seek judgment for the assessments. On March 22, 2017, the Davidson County Chancery Court upheld the assessments and granted judgment on the Department’s counterclaims.
Meanwhile, in 2011, the Department assessed the unpaid franchise and excise taxes owed by PopCat against Bookstaff personally, because PopCat distributed all of its income to Bookstaff. In January 2017, the Department filed an action in the Knox County Chancery Court to collect these taxes pursuant to Tenn. Code Ann. §§ 67-4-2016 and 67-4-2117, and Bookstaff challenged the assessment and sought an injunction against the Department to prevent it from collecting the taxes. Bookstaff also requested a temporary restraining order, which was granted. The trial court then granted the injunction, because the six year statute of limitation had expired, Bookstaff was not a “person” or “taxpayer” for purposes of the franchise and excise tax, and because proof of a fraudulent conveyance was required to assess personal liability on Bookstaff. The Department then filed a timely appeal of the trial court’s ruling.
The issues that the Court of Appeals had to determine were whether the trial court erred in determining that the six-year statute of limitations precluded collection of the tax by the Department, whether the trial court erred in determining that an assessment of franchise and excise tax could not be made against a person, and whether the trial court erred in holding that personal liability against a shareholder for a corporation’s tax required a fraudulent conveyance.
First, the Court of Appeals held that the six-year statute of limitations in Tenn. Code Ann. § 67-1-1429(a) did not preclude the Department from collecting the unpaid tax from Bookstaff. The Department claimed that it filed a counterclaim against PopCat in 2009, which was within six years of the initial assessment against PopCat, that resulted in an assessment against PopCat. The Department then claimed that it could collect said judgment without limitation under Tenn. Code Ann. § 67-1-1429(a)(3). The Court of Appeals agreed with the Department and ruled that it had begun a proceeding in court to collect taxes, which could be collected from a shareholder.
The Court of Appeals held that the trial court erred when it found that the Department could not assess franchise and excise taxes against Bookstaff because he was not a “person” or “taxpayer” for purposes of the franchise and excise tax. While Tenn. Code Ann. § 67-4-2004(38) does not list individuals as being a “person” or “taxpayer” for that purpose, the Department claimed that Tenn. Code Annotated Ann. §§ 67-4-2016 and 67-4-2117 allowed the Department to levy the unpaid franchise and excise taxes from a stockholder of a dissolved corporation when the stockholder has received property belonging to the dissolved corporation, but the amount that could be collected would be limited to the value of the property received. The Court of Appeals agreed, and ruled that because the Department obtained a judgment against PopCat for the unclaimed taxes, it could collect them from Bookstaff as its sole shareholder.
Finally, the Court of Appeals held that the trial court erred when it ruled that Tenn. Code Ann. § 67-1-1444 required that there be a fraudulent purpose in order for the Department to collect from a shareholder the unpaid taxes of a corporation. Bookstaff claimed that Tenn. Code Ann. § 67-1-1444 must be considered when applying Tenn. Code Ann. §§ 67-4-2016 and 67-4-2117, which would require a fraudulent purpose if the Department wished to collect from a shareholder the unpaid taxes of a corporation. The Department claimed that this was in error, because Tenn. Code Ann. § 67-1-1444 is in a different chapter than Tennessee Code Ann. §§ 67-4-2016 and 67-4-2117. The Court of Appeals ruled that Tenn. Code Ann. § 67-1-1444 did not impose the fraudulent purpose requirement on other statutes, it merely provided another method to the Department to collect taxes in a situation where a shareholder received assets from a dissolved corporation with a tax liability, so no fraudulent purpose was required for the Department to collect the unpaid taxes of a dissolved corporation.
This ruling shows how shareholders of dissolved corporations can be held liable for the taxes owed by those corporations, which corporations and their shareholders should be aware of if they are planning on shutting down their operations.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Could Tennessee collect the unpaid franchise and excise taxes of PopCat from its sole shareholder?
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