In Uncategorized on 03/09/2016 at 16:46

Read the Contract – The “F” Is For Emphasis

I won’t go into the lawyering (if you can call it that) surrounding the sale of whatever was sold in Makric Enterprises, Inc., 2016 T. C. Memo. 44, filed 3/9/16.

And yes, there but for the Grace of you-know-Whom go any of us. No schadenfreude here.

Judge Morrison hammers home the Danielson principle: “[A] party can challenge the tax consequences of his agreement as construed by the Commissioner only by adducing proof which in an action between the parties to the agreement would be admissible to alter that construction of the contract or to show its unenforceability because of mistake, undue influence, fraud, duress, etc. * * *.” Danielson v. Com’r., 328 F. 2d 771, at p. 775 (Third Cir., 1965), cited at 2016 T. C. Memo. 44, at pp. 40-41.

The Makric shareholders claim they thought they were selling their Makric stock. Their buyer really didn’t care, as long as they got the stock of Makric’s operating subsidiary, Alpha, with no Makric strings attached (past creditors, contracts, tax liabilities). The buyer’s due diligence, to the extent done, featured Alpha, not Makric. And Judge Morrison picks up on that.

“If [Buyer] had purchased Makric, [Buyer] would have been indirectly burdened with all of Makric’s liabilities, not just Alpha’s liabilities. Makric’s liabilities would have included Makric’s potential tax liability if it were to sell Alpha. If [Buyer] had negotiated for the sale of Makric, rather than Alpha, it might have negotiated a reduced price to account for the burden of Makric’s liabilities.” 2016 T. C. Memo. 44, at pp.50-51.

The Makric shareholders had to sell Makric shares to secure their year-and-a-day holding period for capital gain treatment. Had they liquidated Makric (a holding company) and gotten the Alpha stock, they feared cutting off their holding period.

When the final contract doesn’t say that, various degrees of ambiguity are bandied about, to no avail. Danielson rules. So Makric sold Alpha, with double taxation raining down on the Makric shareholders’ heads.

It’s a tangled tale, with drafting and redrafting of purchase agreements, but no one seemed to coordinate between client and counsel as to who was selling what to whom. The Makric shareholders, of course, testify they read nothing. Their accountant was fed misinformation by Makric’s CFO, and apparently never read the agreement. And never asked the lawyers. And the buyer got what they wanted; hard luck the sellers got bashed.

The lawyers, of course, didn’t testify.

If you want a perfect guide for How Not To Do It, this is it.

Takeaway—What is the deal? Write it in one paragraph or less. If you can’t, you don’t understand it. Once you do and have written the paragraph (or less), let everybody sign off. Then draft the contract…and RTFC. Again.



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