Opinion
21070-21
09-12-2023
WILLGRAND COMPANIES, INC. & SUBSIDIARY, KANNEGIESSER ETECH, INC., SHAREHOLDER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Ronald L. Buch, Judge
Two motions are pending before the Court. The Commissioner filed a Motion to Dismiss for Lack of Jurisdiction on June 30, 2023, arguing that Kannegiesser ETECH, Inc. (ETECH) lacked capacity to bring this case because it is not named in the Notice of Deficiency. Unnamed parties must have capacity under the laws of their state of incorporation to bring a petition on behalf of a named party. Because Minnesota law allows a shareholder of a dissolved corporation to assert or defend claims in the name of the corporation, ETECH has capacity to file a petition on behalf of the taxpayer named in the notice of deficiency. We will amend the caption accordingly. Also pending is the Commissioner's Motion for Continuance filed August 17, 2023, which is premised on doubt over the Court's jurisdiction in this case. Having resolved that doubt, we will deny the Motion for Continuance.
BACKGROUND
Willgrand Companies, Inc. (Willgrand) was a Minnesota corporation. On March 31, 2017, the owner of Willgrand, Joseph Schult, and Passat Laundry Systems, Inc., DBA Kannegiesser USA (Passat), finalized a Stock Purchase Agreement, wherein Passat agreed to purchase all Willgrand's stock. Upon completion of the agreement, Passat fully owned and controlled Willgrand as its sole shareholder. Soon after, Passat changed its name to ETECH. Like Willgrand, ETECH is a Minnesota corporation. On October 1, 2017, Willgrand filed a Notice of Intent to Dissolve pursuant to Minn. Stat. § 302A.723 (1982), commencing its windup period. Willgrand's windup period ended on January 12, 2018, when it filed its articles of dissolution per Minn. Stat.§ 302A.723, subd. 2 (1982).
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times and all Rule references are to the Tax Court Rules of Practice and Procedure.
In August 2018, the Commissioner initiated an audit of Willgrand for tax years 2015 and 2016 (years in issue). On June 3, 2021, the Commissioner issued a notice of deficiency to Willgrand for the years in issue. ETECH timely filed a petition, disputing the Commissioner's determinations against Willgrand. As trial neared, the Commissioner moved to dismiss this case for lack of jurisdiction.
DISCUSSION
I. Jurisdiction over Petitions Filed by Parties Other Than the Named Taxpayer
In a deficiency case, this Court generally has jurisdiction if a timely petition is filed by the taxpayer named in the notice of deficiency. See Rule 60(a). Alternatively, a duly appointed fiduciary may bring a case on behalf of the named party in a deficiency proceeding. Id. If a party is not named in the notice of deficiency and is not a fiduciary, then Rule 60(c) provides that such a person must have capacity as defined under pertinent state law.
Minnesota law governs whether ETECH has capacity. The capacity of a corporate party is determined according to the law under which it is organized. Rule 60(c). Willgrand and ETECH were both organized under the laws of Minnesota, so we look to Minnesota law to determine capacity to bring suit on behalf of Willgrand, the taxpayer named in the Notice of Deficiency.
II. ETECH Must Have Capacity as the Surviving Corporation or as a Shareholder of Willgrand
We look to Minnesota law to determine whether ETECH has capacity either as the surviving corporation or as the shareholder of the now-dissolved Willgrand. Under Minnesota law, ETECH has capacity to challenge the redetermination of Willgrand's tax liability for the years in issue if: (1) the entities merged; (2) Willgrand incurred the tax liability during windup and some or all of its assets were distributed to ETECH during liquidation; or (3) ETECH is a former shareholder of Willgrand. We address these in turn.
A. Capacity as Surviving Corporation
We have held that a surviving corporation has capacity to file a petition for redetermination of deficiency determined against a merged corporation if the surviving corporation is primarily liable for the debts and obligations of the merged corporation under state law. Techtron Holding, Inc. v. Commissioner, T.C. Memo 2023-29, at *13, n.17; Alaska Salmon Co. v. Commissioner, 39 B.T.A. 455, 457-58 (1939); see also Popular Libr., Inc. v. Commissioner, 39 T.C. 1092, 1093 (1963).
Minnesota law does not classify the transaction between ETECH and Willgrand as a merger or exchange. Minnesota law defines a "merger" as a corporation merging with one or more domestic or foreign corporations to form a single corporation pursuant to a plan of merger. Minn. Stat. § 302A.601, subd.1. An "exchange" under Minnesota law is an acquisition of all outstanding stock of one or more domestic or foreign corporations pursuant to a plan of exchange. Id. at subd.2. Articles of a merger or exchange must be prepared and filed with the Secretary of State. Minn. Stat. § 302A.615, subd.2(2016). The Secretary will thereafter issue a certificate of merger to the surviving organization, or a certificate of exchange to the acquiring corporation. Id. at subd.3. Once a merger becomes effective, the surviving corporation is responsible for all liabilities and obligations of any and all constituent organizations. See Minn. Stat. § 302A.641, subd.2e (2014). An exchange, however, does not expressly require or not require the acquiring corporation to bear the responsibility of the obligations or liabilities of the subsidiaries.
The result of the Stock Purchase Agreement between ETECH and Mr. Schult was that Willgrand was solely owned by ETECH. The record does not reflect either party ever receiving a certificate of merger or exchange. Indeed, ETECH affirmatively states that neither Willgrand or ETECH "had the intention of entering into a merger or an exchange." The Stock Purchase Agreement was not a merger or exchange under Minnesota law, thus ETECH is not a surviving corporation and lacks capacity on this ground.
B. Capacity as Shareholder Liable for Debts incurred During Windup
Under Minnesota law, shareholders can be liable for the debts incurred during windup of a dissolving corporation if the dissolving corporation's assets are insufficient to satisfy a creditor's claims. Minnesota law requires all corporate debts and liabilities "incurred in the course of winding up the corporation's affairs" to be paid before assets are distributed to shareholders. Minn. Stat. § 302A.781, subd.3(2011). If this fails to happen, a creditor "may pursue any remedy . . . against the officers and directors . . . or shareholders." Id. Thus, if Willgrand's tax liability was incurred during its windup phase, ETECH, as the sole shareholder, could be held liable to the extent it received any distributions before Willgrand's debts and liabilities were paid. See Minn. Stat. § 302A.559 (1982).
But Willgrand's tax liability did not incur during its windup phase. Corporate windup periods begin when a notice of intent to dissolve is filed and continue "until dissolution proceedings are revoked or articles of dissolution are filed with the secretary of state." Minn. Stat. § 302A.723 subd.2(1982). For Willgrand, this period began on October 1, 2017, when it filed its notice of intent to dissolve, and ended on January 12, 2018 when it filed its articles of dissolution. The audit into Willgrand's years in issue began on August 29, 2018. And the Commissioner issued Willgrand a Notice of Deficiency for the years in issue on June 3, 2021. Both of these events occurred after the articles of dissolution were filed. Thus, the liability was not incurred during the windup period. Therefore, ETECH lacks capacity on this ground.
C. Capacity as a Former Shareholder
ETECH had capacity to file the petition as a former shareholder of Willgrand. Minnesota law allows the shareholder of a dissolved corporation to assert or defend claims in the name of the corporation. "After a corporation has been dissolved, any of its former officers, directors, or shareholders may assert or defend, in the name of the corporation, any claim by or against the corporation." Minn. Stat. § 302A.783 (1981). This provision has been applied in federal courts. For example, the United States District Court for the District of Minnesota held that shareholders of a since-dissolved corporation could bring suit against a service provider for wrongfully withholding services. Firstcom, Inc. v. Qwest Corp., 2004 U.S. Dist. LEXIS 11658 (D. Minn. June 21, 2004). In that case, the defendant, Qwest, alleged that the shareholders of the since-dissolved corporation lacked capacity to bring suit. Id. at *6-7. The Court determined the text of Minn. Stat. § 302A.783 was "clear and unambiguous" and that "shareholders may assert any claim in the name of the corporation." Id. at *7. Like the petitioner shareholders in Firstcom, ETECH may assert this claim against the Commissioner as a shareholder of Willgrand despite the suit commencing after the final dissolution of Willgrand.
In support of his motion to dismiss, the Commissioner relies on L.V. Castle Inv. Group Inc. v. Commissioner, 465 F.3d 1243 (11th Cir. 2006), which held that shareholders lacked capacity to sue on behalf of a dissolved corporation. But the Court in L.V. Castle was applying Illinois law. That case did not address, and sheds no light on, the application of Minn. Stat. § 302A.783 (1981). In contrast, Firstcom states unequivocally that section 302A.783 allows shareholders to "assert any claim in the name of the corporation." Firstcom, Inc., 2004 U.S. Dist. LEXIS at *7. Rule 60(c) states that questions of capacity are determined according to state law, and Minnesota law permits ETECH to bring this case as a shareholder of the now-dissolved Willgrand.
III. Conclusion
Because Minnesota law allows ETECH to assert claims in the name of Willgrand, it is
ORDERED that the Commissioner's Motion to Dismiss for Lack of Jurisdiction filed June 30, 2023, is denied. It is further
ORDERED that the caption of this case is amended as follows: Willgrand Companies, Inc. & Subsidiary, Kannegiesser ETECH, Inc., Shareholder, Petitioner v. Commissioner of Internal Revenue, Respondent. It is further
ORDERED that the Commissioner's Motion for Continuance filed August 17, 2023, is denied.