Friday, April 5, 2013

fraudulent transfer - substance over form - alter ego

RUNVEE, INC v. U.S., Cite as 111 AFTR 2d 2013-XXXX, 03/26/2013 RUNVEE, INC.,

 Transfer to Plaintiff may have been made with actual intent to evade tax Defendant has established that genuine issues of fact exist requiring a trier of fact to determine whether the transfer to Plaintiff was made with actual intent to evade tax.

A transfer made by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation “[w]ith actual intent to hinder, delay or defraud any creditor of the debtor.” N.R.S. 112.180(1)(a).

Factors which may be considered in making this determination include: ((a)) The transfer or obligation was to an insider; ((b)) The debtor retained possession or control of the property transferred after the transfer; ((c)) The transfer or obligation was disclosed or concealed; ((d)) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; ((e)) The transfer was of substantially all the debtor's assets; ((f)) The debtor absconded; ((g)) The debtor removed or concealed assets; ((h)) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; ((i)) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; ((j)) The transfer occurred shortly before or shortly after a substantial debt was incurred; and ((k)) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. N.R.S. § 112.180(2); see also Herup, 123 Nev. at 233–34.

y. To the extent the facts of the cases parallel this one, the most apposite of the cases is the Feldman case — a case in which the Tax Court concluded that the purported “sale” of stock and payment to the former shareholders constituted a fraudulent transfer. InFeldman , the Tax Court focused on several factors that parallel this case. See T.C. Memo. 2011-297 [TC Memo 2011-297] at 12–14. Id. First, the bridge loan to the purchaser of the stock was funded with the cash of the Target. Id. at 12–13. Second, at the time of transfer to the purchaser, the Target's assets consisted of only cash and all operating assets had already been sold — the Target did not have any business activities. Id. at 13. Third, the Target “was nothing more than a shell, with no employees, no real property, and no assets other than the [purchaser's] share of the unpaid taxes.” Id. Fourth, the real price paid by the purchaser was for the stock had nothing to do with the value of the Target but rather entailed splitting the purported tax savings. Id. at 14. Finally, the purchasers had no intention of ever paying the tax liabilities.Id. at 13–14.

The substance of a transaction, and not its form, governs its consequences. See Kline v. Robinson, 83 Nev. 244, 250 (1967), overruled in part (on other grounds), Pease v. Taylor, 88 Nev. 287 (1972); see also Robinson v. Durston, 83 Nev. 337, 339–40, 350–52 (1967). “The substance of the transaction is its commercial content and economic meaning.” Swallow Ranches, Inc. v. Bidart, 525 F.2d 995, 998 (9th Cir. 1975) (discussing Nevada law)). “What the law does not permit a taxpayer to do in seeking to avoid taxes is to cast transactions in forms when there is no economic reality behind the use of the forms.” Owens v. Commissioner, 568 F.2d 1233, 1237 [41 AFTR 2d 78-419] (6th Cir. 1977). InOwens , the taxpayer purported to sell an all-cash company to third parties for cash. The Court of Appeals disregarded the sale, finding four circumstances that led to the conclusion that the taxpayer had not sold the equity in his business: (1) the corporation “had only cash as an asset,” (2) the corporation “carried on no business activity and thus was a lifeless shell at the time of the purported sale of stock,” (3) “taxpayer was the sole shareholder of [the corporation] and thus was in exclusive control of the corporation,” and (4) the purported stock purchasers withdrew all the cash from the corporation to finance the loan used for the purchase price. Id. at 1239–40. Under these circumstances, which also exist in this case “[w]hat taxpayer actually sold to [the third parties] was the right to distribute a quantity of cash to themselves. Moreover, that right to a distribution of cash was in substance no different than the cash that taxpayer received for the stock.” Id. at 1240; see also Lowndes v. United States, 384 F.2d 635, 637 [20 AFTR 2d 5611]–38 (4th Cir. 1967). For the reasons discussed in Owens, the Court could at trial disregard the fictional “sale” to Desert Flower. If the “sale” is disregarded, one of two consequences follows: Plaintiff should be found to be the mere continuation of Runvee Holdings or, in the alternative, Plaintiff should be found to be the alter-ego and nominee of the Shaws and their alter-ego, Runvee Holdings. F. Plaintiff may be characterized as the mere continuation of Runvee Holdings Under Nevada law, a buyer of assets may be characterized as a mere continuation of the seller if “(1) only one corporation remains after the transfer of assets; and (2) there is an identity of stock, stockholders, and directors between the two corporations.” Village Builders 96, L.P. v.U.S. Laboratories, Inc., 121 Nev. 261, 274 (Nev. 2005) (citation omitted); see also Lamb v. Leroy Corp., 85 Nev. 276, 279 (1969). Defendant has raised genuine issues of fact that require resolution by a finder of fact regarding whether Plaintiff meets both characteristics. First, the Plaintiff is the sole surviving corporation as between Plaintiff and its predecessor, Runvee Holdings. The last corporate filing for Runvee Holdings in Delaware occurred on or about July 15, 2004, shortly after the Plaintiff's “purchase” and the ensuing “sale” to Desert Flower. That filing was a name change — which Defendant asserts should be inferred as designed to erase any connection with the Shaws, as required under the terms of the SPA. (Ex. P at 15 § 8.2). Alternatively, and looking past mere formalisms, if one disregards the “sale” to Desert Flower, then, Plaintiff (or alternatively the Shaws) must be the successor to Runvee Holdings. Second, there is a compelling identity at all levels between Plaintiff and Runvee Holdings. The sole business asset of Runvee Holdings resides with Plaintiff. Plaintiff's alter-ego is the transferee of Runvee Holdings' cash, minus fees paid to Desert Flower. (SOF ¶¶ 6–7, 11, 14, 43–47, 50–56). The same beneficial owners of Runvee Holdings now own Plaintiff; the same persons who managed Runvee Holdings now manage the Plaintiff. The only difference between the two is the omission of “Holdings” from Plaintiff's corporate name. In sum, Plaintiff is a “mere continuation” of Runvee Holdings.

G. Alternatively, Plaintiff may be the alter-ego and/or nominee of Runvee Holdings Alter-ego liability entails proof of three elements: “(1) the corporation is governed and influenced by the people [or entity] asserted to be its alter egos, (2) there is a unity of interest and ownership such that the two are inseparable,” and (3) ““adherence to the fiction of separate entity would ... sanction a fraud or promote injustice.”” 12House of Brussels Choc. v. Whittington , 2008 WL 6096451, at 2 (Nev. Nov. 3, 2008) (citation omitted).

The following factors may indicate the existence of an alter-ego relationship: (1) commingling of funds; (2) undercapitalization; (3) unauthorized diversion of funds; (4) treatment of corporate assets as the individual's own; and (5) failure to observe corporate formalities. LFC Mktg. Group, v. Loomis, 116 Nev. 896, 904 (2000). Whether Plaintiff is the alter ego of Runvee Holdings is essentially a factual question. See Wolf v. United States, 798 F.2d 1241, 1243 [58 AFTR 2d 86-5678]–44 n.2 ((th Cir. 1986). In this case, the Shaw family treated both Plaintiff and Runvee Holdings as an extension of themselves. The capital structure created by the Shaws reflects a unity of interest between Plaintiff and its beneficial owners — as does the circular flow of funds involved in Plaintiff's “purchase.” Moreover, under the circumstances of this case, and given the Shaw family's plan to evade over $35 million in taxes, a failure to disregard Plaintiff's corporate form would perpetuate an injustice on the United States. Finally, if the “sale” to Desert Flower is nothing more than a fiction, then Plaintiff is surely also the nominee of the Shaw family and is holding title to the 111-acre property at issue on their behalf. See Nelson v. United States, 1990 WL 169245 [71A AFTR 2d 93-3972] at 3–4 (D. Nev. Sept. 27, 1990), aff'd in part (nominee analysis) and remanded on other grounds, 942 F.2d 792 (9th Cir. 1991). (212) 588-1113

No comments: