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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).
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.
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.
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).
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).