By: A.J. Cook


One taxpayer failed to file returns for 50 years. The company contacted the Internal Revenue Service, and the agency said that's OK.

Two years later, the agency changed its mind and wanted returns for those 50 years.

The taxpayer was Front Royal and Riverton Improvement Company of Virginia, a land purchasing and development company. A suit by a creditor had caused it to go into receivership in 1894, after a few years of operation. A court appointed a receiver to control company assets for creditors and owners.

By 1909 all the creditors had been paid. But by then the list of stockholders had been lost. When the corporation was formed, it sold more than 31,000 shares, with many shareholders buying less than one percent of the company. After the receivership, the shareholders, probably figuring their investment was worthless, either forgot about their ownership, died or both.

For 77 more years, with new receivers coming and going, the business moved like a glacier. Then Ron Lewis Napier took over as a receiver, the first one with an inquiring mind. He wanted to know if the company owed taxes for prior years. So he wrote the IRS and asked it to contact him but received no answer. He also wanted to know who owned the company: heirs of shareholders, creditors or anyone else. So he asked the courts to decide who owned it and if anyone did, where the heck were they?

Napier made the IRS a party to the suit, so if it wanted to, it could argue that the company owed some taxes. The IRS wrote back thanking him for his concern and assuring him the company owed no taxes for prior years. He replied with an "are you sure?" letter.

Meanwhile, the estate of only one stockholder, W.A. Corron, stepped forward to claim his share.

The agency then surprised everyone It telling the court taxes were due from 1942 through 1992, the year before the corporation started filing returns. It said that after adding penalties and interest, the company was now owned by the IRS.

Why did the IRS pick 1942, the judge asked. It said that sometime between 1913, the first year of the tax code, and 1942, a receiver should have known that income taxes were due. The judge wondered when this "Damascene revelation occurred to the receiver."

In court Napier argued that the receivership was created before the tax code so the government didn't have the authority to tax the company. Furthermore, the assets were under the control of the bankruptcy court and protected from plunder by anyone-even the government.

Before responding to Napier or the IRS, the judge discussed the control of the company.

Receivers came and went, and each succeeding one plodded stolidly along in the footsteps of his predecessor. In 1913, the income tax was enacted, and thereafter each receiver, except for the last one, unfittingly failed to pay.

Then the judge said what he thought of this taxing agency:

The IRS, which was not even embryonic in 1894, now is in the full strength of its adulthood, and armed with the rectitude of omniscient hindsight and an insatiable appetite, now wishes to elevate the receivers nonpayment of taxes to culpable maladministration, so that all the funds of the receivership will be paid to the IRS.

The judge ruled that tax was due, but the company didn't owe any penalties. He ruled this way because of the complexity of the tax code and the unique facts and because the receivers reasonably believed that being under court supervision removed the requirement to pay taxes. He then added:

• Taxes and interest were due for 1942 through 1992.
  
• For its 11 shares in the company, Corron's estate would receive 3/100th of one percent of the assets after the IRS got its money.
  
• Legal and other fees would then be paid.
  
• The state of Virginia would get whatever was left, as unclaimed property.
  

The Moral: You can run, but you can't hide (at least not more than 50 years) from the IRS.



A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
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Released 8-16-99