First, picture the dream.
You are a successful Tennessee entrepreneur. A small business that you own through a corporation that you are the sole shareholder in has grown over the years, has made money, and is now the focus of a prospective buyer.
There are dollar signs in your future. All is good.
You have your corporation sell the small business that it owns, and it then distributes the sale proceeds to you as its sole shareholder.
Since your corporation no longer owns the small business that was sold and all the money has been distributed to you, you file articles of dissolution for your corporation.
Next, envision the nightmare.
The State of Tennessee determines that the money you corporation made from the sale of the business is subject to state franchise and excise tax (“F&E Tax”). And the State says that your corporation owes it F&E Tax, plus penalties and interest, exceeding $1.5 million.
But, wait the nightmare gets worse. Your dissolved corporation doesn’t have funds to pay the tax bill that the State says must be paid, and so, guess what? The State sends you personally a bill for the full amount. The State says you got the sale distributions, so you have to pay the unpaid F&E Tax.
This is where it gets kind of interesting from a legal point of view.
You see, there are some Tennessee statutes (namely, T.C.A. Sections 67-4-2106 and 67-4-2117) that essentially give the State of Tennessee the power to collect the F&E Tax, together with penalty and interest, from any officer, stockholder, partner, member, principal, or employee of a taxpayer that is out of business or has dissolved, liquidated, otherwise terminated at a time when it has refused or failed to pay the F&E Tax.
Based on these provisions, it looks like you’re out of luck. After all, you are the sole shareholder of a dissolved corporation that has failed to pay its F&E Tax.
But, wait. If it were that straightforward, your case wouldn’t be that interesting or challenging. And, I wouldn’t be blogging about it.
There is a Tennessee statute (T.C.A. Section 67-1-1444) that provides that when assets are conveyed by a person owing taxes to the State of Tennessee, and such conveyance of assets was fraudulent (i.e., made by a debtor to avoid collection by a creditor), then the State may proceed to collect such tax debt from the transferee. And this statutory provision was in the law before the Tennessee statutes that give the State the power to collect the F&E Tax from a stockholder of a dissolved corporation.
In your case, no one has claimed that there was anything fraudulent about the distribution of money to you from your now-dissolved corporation. So, the argument is that when the legislature added T.C.A. Sections 67-4-2106 and 67-4-2117 it did so with the knowledge that a fraudulent conveyance was required in order to give the State the power to collect a tax debt from a transferee. So, the argument goes, no proof of a fraudulent conveyance, no ability to collect the F&E Tax from you personally.
But, unfortunately for you, the Tennessee Court of Appeals didn’t see it that way.
It reads the law to be that solely in in those situations where the transferee of assets is a shareholder in a now-dissolved corporation, there is no requirement for there to be a fraudulent conveyance in order for the State of Tennessee to collect unpaid F&E Tax from a shareholder that has received a distribution from the now-dissolved corporation.
In all other cases and in all other situations, the State must show the existence of a fraudulent conveyance in order to impose personal liability for a tax debt on a person who has received assets from the taxpayer that failed to pay its tax debt to the State.
The entrepreneur’s dream and the resulting Tennessee tax nightmare (and the Court of Appeals decision) can be found at Bookstaff v. Commissioner (click here for opinion).
The moral of the story may be this: if you are fortunate enough to make a lot of money from the sale of a business, make sure all required state taxes are paid. Otherwise, you might get an unpleasant surprise in the form of a tax bill from Uncle Tennessee.