Opinion
Case No. 00-75370
October 24, 2003
MEMORANDUM AND ORDER CONFIRMING SALE OF STOCK
I. Introduction
This is a tax case. Defendants are Edwin J. Kerner (Kerner) and Sandra Kerner, Judgment was entered in favor of the government for the unpaid balance of income tax owed by Kerner for the period from 1986 to 1995 on October 9, 2001. The government imposed a federal tax lien on various real properties owned by Kerner and 1000 shares of stock of King of Imlay, Inc. (King of Imlay), a Subchapter S corporation. The 1000 shares represent a 25 percent interest in the corporation. By Order of Foreclosure by Sale of July 17, 2002, the Court ordered the Internal Revenue Service (IRS) to sell the properties at public auction subject to court approval. The sale of the real properties was subsequently confirmed and the proceeds distributed, leaving only the 1000 shares of stock, which were not sold at public auction. Before the Court is the United States' motion for an order confirming the sale of the 1000 shares to Anthony J. Versaci and Michael G. Lucci, the other shareholders of King of Imlay, for an aggregate payment of $325,000,
The objections to the motion by Sandra Kerner are overruled. As stated in the Order Distributing Proceeds of April 30, 2003, she had no interest in the properties foreclosed.
For the reasons that follow, the United States' motion will be granted.
II. Factual Background
Kerner owns 1000 shares of stock of King of Imlay, which he purchased in 1992 by contributing land to the corporation. King of Imlay owns and operates a Burger King restaurant franchise in Irnlay City, Michigan. Kerner's 1000 shares represent 25 percent of the issued and outstanding shares of the company. The remaining 75 percent of the shares are owned by Versaci and Lucci.
Kerner has submitted a statement of King of Imlay's assets and liabilities for 2002, which shows that the corporation's land was recently valued at $156,250, Kerner mistakenly says that the land was valued at $461,243. However, as shown on the statement, the land was valued at $156,250 while the building was valued at $461,243.
Versaci and Lucci have each offered to pay $162,500 for 500 shares of Kerner's stock in King of Imlay within thirty days of confirmation,
III. Discussion
On July 17, 2002, the Court ordered the IRS to sell all of the lined properties at public auction pursuant to 28 U.S.C. § 2001, 2002, and 2004, which require published notice and appointment of three disinterested appraisers. The Order of Foreclosure by Sale stated that u[n]otice of the sales shall be published once a week for four consecutive weeks prior to the sales in at least one newspaper regularly issued and of general circulation in Lapeer County, Michigan, and by such other notice, if any, as the IRS shall deem appropriate," The Order also provided that the proceeds of the sales would be distributed "[f]irst, to the United States of America, in reimbursement for the expenses of advertising and sale."
A. Authority to Order a Private Sale
The government says that by dispensing with the public auction procedures for the stock, as well as the associated advertising and sale expenses, the entire purchase price offered by Versaci and Lucci can be applied to Kerner's tax liabilities. The government argues that the law does not require foreclosed property to be sold by auction:
The district courts of the United States at the instance of the United States shall have such jurisdiction to make and issue in civil actions, writs and orders of injunction, and of ne exeat republica, orders appointing receivers, and such other orders and processes, and to render such judgments and decrees as may be necessary or appropriate for the enforcement of the internal revenue laws.26 U.S.C. § 7402(a) (emphasis added). The procedure for a private sale of personal property like shares of stock is outlined in 28 U.S.C. § 2004, which states that "[a]ny personalty sold under any order or decree of any court of the United States shall be sold in accordance with section 2001 of this title, unless the court orders otherwise." 28 U.S.C. § 2004 (emphasis added).
Fed.R.Civ.P. 70 also provides that "[i]freal or personal property is within the district, the court in lieu of directing a conveyance thereof may enter a judgment divesting the title of any party and vesting it in others and such judgment has the effect of a conveyance executed in due form of law."
Kerner says, however, that a sale of property must be made pursuant to the detailed requirements of section 2001, The Department of Justice Tax Division Judgment Collection Manual (Manual) § IV.E.2 states:
Typically, when the Government has a federal tax lien on property, a suit to foreclose the lien is brought pursuant to I.R.C. § 7403 and, once a judgment is entered in favor of the Government foreclosing the lien, a judicial sale of the property proceeds in accordance with 28 U.S.C. § 2001.
However, the Manual also states that "[a] district court has broad powers under I.R.C. § 7402(a) to issue orders to ensure the orderly sale of property." Manual § IV.E.2.a. Moreover, as an internal guide for the Tax Division, the Manual does not have the force of law. Under 26 U.S.C. § 7402(a) and 28 U.S.C. § 2004, which states that the requirements of section 2001 must be followed "unless the court orders otherwise," the Court clearly has the discretionary authority to confirm the private sale to Versaci and Lucci. See United States v. Stonehill, 83 F.3d 1156, 1160 (9th Cir. 1996) ("it is at the district court's discretion whether to obtain appraisals before foreclosing upon personal property"); United States v. Grable, 25 F.3d 298, 303 (6th Cir. 1994) (holding that there was "no abuse of discretion" by the district court in confirming the sale of property);Tanzer v. Huffines, 412 F.2d 221, 222 (3d Cir. 1969) ("We think it is clear that the federal statute does express a preferential course to be followed in connection with a court authorized sale of property and that the district court should not order otherwise except under extraordinary circumstances. We nevertheless recognize that where, as here, the court does proceed apart from the statute the test is still one of whether there has been an abuse of discretion in the circumstances,");United States v. Branch Coal Corp., 390 F.2d 7, 10 (3d Cir. 1968) ("except in cases of abuse, appellate courts will not disturb the exercise of a district court's discretion in setting the terms and conditions for a judicial sale and the confirmation thereof").
B. Exercise of Discretion
The next question is whether the Court should exercise its discretion to dispense with the requirements of section 2001. Kerner says that the $325,000 price offered by Versaci and Lucci is too low. As his stock represents a 25 percent interest in the corporation, the offer suggests that the corporation as a whole is worth $1,300,000.
Kerner has not identified any potential buyers for his stock. Indeed, generally speaking, there is no market among third parties for a minority interest in a Subchapter S corporation. A private sale to the other shareholders of the corporation is likely to get the best possible price under the circumstances.
Kerner cites Schedule K-1s filed by King of Imlay for each year from 1997 to 2001 as evidence of a higher value. The K-1s show that Kerner's portion of the ordinary income for each year was $42,710, $50,026, $62,427, $39,725, and $42,211, respectively. Kerner says that he was entitled to these amounts each year as a distribution but has never received any money.
The government correctly points out that Kerner misconstrues the function of a K-1. The income of a Subchapter S corporation is taxed to the shareholders rather than to the corporation itself. The corporation files a K-1 for each individual shareholder to indicate what portion of the corporate income is taxable to that shareholder:
Although the corporation may have to pay a built-in gains tax and an excess net passive income tax, you, the shareholder, are liable for income tax on your share of the corporation's income, whether or not distributed, and you must include your share on your tax return if a return is required.
. . . .
Schedule K-1 does not show the amount of actual dividend distributions the corporation made to you. . . . You report actual dividend distributions on Form 1040, line 9.
Shareholder's Instructions for Schedule K-1 (Form 1120S) (2002) (emphasis added). available athttp://www.irs.gov/pub/irs-pdf/i1120ssk.pdf. The fact that income of the corporation was attributed to Kemer as a 25 percent shareholder does not mean that King of Imlay was required to make distributions to him. Predicating value of shares of stock on the income of a Subchapter S corporation is not a reasonable basis for valuation.
Kerner also says that he was entitled to distributions because King of Imlay made loans" to Versaci and Lucci of $158,264, However, these payments were justified because Versaci and Lucci are personally liable for the mortgage obligations of King of Imlay, while Kerner is not personally liable.
The government says that because Kerner still owes over $3 million in unpaid taxes, the amount remaining after the sale of the stock will still be far greater than Kerner will ever be able to pay. Thus, dispensing with the advertising and sale expenses of a public auction outweighs the small possibility that the offer by Versaci and Lucci is not the largest amount that could be obtained.
IV. Conclusion
For the foregoing reasons, the United States' motion for an order confirming the sale of stock to Anthony J. Versaci and Michael G. Lucci for an aggregate payment of $325,000 is GRANTED and an order confirming such a sale will be entered.
SO ORDERED.
ORDER CONFIRMING SALE OF STOCK
The plaintiff, the United States of America, having requested, pursuant to Fed. Rule Civ. Pro. 70, an order of this Court confirming the sale of 500 shares Of capital stock in King of Imlay, Inc., a Michigan corporation, owned by Edwin J. Kemer, to each of Anthony J. Versaci and Michael G. Lucci, in exchange for an aggregate sum of $325,000, payable to the United States of America, for application to the unpaid tax liabilities of Edwin J. Kerner, and good cause having been found.IT IS THEREFORE ORDERED THAT the sale of the 1000 shares of capital stock in King of Imlay, Inc., a Michigan corporation, owned by Edwin J, Kerner, to Anthony J. Versaci and Michael G. Lucci, in exchange for the aggregate sum of $325,000, payable to the United States of America, for application to the unpaid tax liabilities of Edwin J. Kerner, is hereby confirmed, and, upon the payment of the aggregate sum of $325,000 to the United States within 30 days of the entry of this order, Anthony J, Versaci and Michael G. Lucci shall each immediately become the owner of 500 shares of capital stock in King of Imlay, Inc., that were formerly owned by Edwin J. Kerner, with all of the rights associated therewith, free and clear of any rights, titles, liens, claims or other interests of the United States, Edwin J. Kerner, Sandra J. Kemer, and all of the other parties to this action, and any successors in interest or transferees of all of these parties. Upon payment, the United States shall file a notice thereof with this Court.