The opinion of the court was delivered by: JACOB MISHLER
The United States of America ("Government") claims that defendant Red Stripe, Inc. formerly known as Asher Bros., Inc. ("hereinafter referred to as "Red Stripe"),
has to pay federal corporate income taxes for the fiscal years ending June 30, 1975, 1976, 1977, 1978 and 1979 and seeks to reduce to judgment the corporate income taxes due from Red Stripe, Inc.
The Government also maintains that the transfer of Red Stripe's assets to its sole stockholder, defendant George Asher ("Asher"), was a fraudulent conveyance. Plaintiff seeks to reduce to judgment Asher's tax liability as a transferee for the unpaid taxes on investments in four limited partnerships for the tax years 1975, 1976 and 1977.
The issues were tried to the court.
Red Stripe was a New York corporation with its principal place of business in New Hyde Park, New York. Defendant George Asher, who currently resides in Hollywood Florida, lived in Great Neck, New York, during the time of the events complained of.
LIABILITY FOR TAX YEARS 1975, 1976 AND 1977
For the tax years ending in 1975, 1976 and 1977, Red Stripe filed income tax returns which claimed tax reductions and investment credits relating to its investment in four limited partnerships, i.e., Brighton Associates, Plaza Group, Sunny Hill Associates and Road Group.
On October 20, 1983, the I.R.S. assessed deficiencies of $ 11,980.00 for the taxable year of 1975, $ 47,166.00 for the tax year 1976 and $ 198,848.00 for the tax year of 1977. This did not include the statutory rate of interest.
Red Stripe claims that it is not responsible for these taxes. It maintains that these debts were assumed by the Beatrice Food Corporation ("Beatrice"), when Beatrice purchased Red Stripe from Mr. Asher, in exchange for 180,000 shares of Beatrice common stock, in August, 1979.
The Beatrice stock that was transferred to Red Stripe was valued at $ 3,982,500 or $ 22.125 per share. The parties intended the transaction to qualify as a tax free reorganization pursuant to I.R.C. § 368 (a)(1)(C). After the reorganization, which occurred in August 1979, Red Stripe ceased to function as an operating business.
Pursuant to the Agreement and Plan of Reorganization ("Agreement") between Beatrice and Red Stripe, it is unclear whether Beatrice agreed to assume some, or all, of Red Stripe's tax liabilities. For the most part, the Agreement appears to state that Beatrice did not agree to assume the tax liability for Red Stripe's limited partnership investments.
Section 1.02 of the Agreement states in pertinent part that Beatrice did not acquire:
the assets reflected on the Company Balance sheet under the caption 'Deferred Credits - Partnership interest and other' (including the limited partnership interests of the Company in the Road Group, The Plaza Group, Brighton Associates and Sunny Hill Associates
Section 1.03 of the Agreement states that Beatrice would not assume any:
liability or obligation . . . in connection with or relating to any of the Retained Company Assets (including the limited partnership agreements referred to in Paragraph 8(d) of the Company letter."
The Agreement states in section 1.04 (a) that:
Beatrice shall not be responsible for, and shall not assume or undertake to pay, perform, satisfy or discharge, any liability or obligation of the Company or the Company Liabilities and Obligations.
The company and/or the Company Shareholder, as the case may be, shall remain responsible for the Retained Company liabilities and obligations.
However, Exhibit G, the Assumption Agreement and Undertaking, states on page 2 that Beatrice agrees to assume the "liabilities and obligations of the Company (Red Stripe) for federal and state income taxes referred to in paragraph 11 of the Company Letter . . . ."
Paragraph 11, § (c) of the Company Letter states:
The Company has waived the statute of limitations with respect to the assessment of federal income taxes relating to the limited partnership interests of the Company in The Road Group, The Plaza Group, Brighton Associates and Sunny hill Associates.
The Assumption Agreement and Undertaking appears to state that Beatrice would be responsible for the tax liabilities on the limited partnerships. In contrast, the Agreement and Plan of Reorganization states that Red Stripe would be responsible for the taxes. We do not, attempt to construe the intent of the contracting parties because, as discussed below, the assumption agreement has no effect on Red Stripe's tax liability.
All of Red Stripe's operating assets, except for a sailboat valued at roughly $ 27,000, a condominium valued at approximately $ 100,000 and an interest in worthless limited partnership tax shelters, were transferred to Beatrice. One month after the reorganization, 153,000 Beatrice stock shares were transferred to Asher. Shortly thereafter, the condominium and sailboat were conveyed to Asher. Over the next year, the remaining 27,000 shares of Beatrice stock were released from escrow and transferred to Asher.
In exchange for the transfer of Beatrice stock, Asher redeemed all of his stock in Red Stripe. However, his Red Stripe stock retained little, if any value, because the corporation's only valuable asset, the Beatrice stock, had already been ...