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Bookstaff v. Gerregano

Court of Appeals of Tennessee, Knoxville

December 20, 2017

BLAKE BOOKSTAFF
v.
DAVID GERREGANO, COMMISSIONER OF REVENUE, STATE OF TENNESSEE

          Session September 12, 2017

         Appeal from the Chancery Court for Knox County No. 192969-2 Clarence E. Pridemore, Chancellor

         In this action, the Tennessee Department of Revenue ("the Department") sought to collect unpaid franchise and excise taxes owed by a dissolved corporation from its former shareholder. The trial court entered a judgment in favor of the shareholder, determining that the Department could not collect on the assessments originally issued in 2008 and 2009 due to the six-year statute of limitations contained in Tennessee Code Annotated § 67-1-1429. The trial court also determined that the shareholder was not a "person" or "taxpayer" subject to franchise and excise taxes because those taxes are assessed solely against entities such as corporations. Finally, the trial court determined that the shareholder had no personal liability for the taxes owed by the dissolved corporation absent proof of a fraudulent conveyance. The Department timely appealed. Determining that the trial court erred in its construction and application of the applicable tax statutes, we reverse the judgment in favor of the shareholder.

         Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed; Case Remanded

          Herbert H. Slatery, III, Attorney General and Reporter; Andrée S. Blumstein, Solicitor General; Charles L. Lewis, Deputy Attorney General; and Jonathan N. Wike, Senior Counsel, for the appellant, David Gerregano, Commissioner of Revenue, State of Tennessee.

          John A. Lucas, Knoxville, Tennessee; G. Michael Yopp and Christopher A. Wilson, Nashville, Tennessee, for the appellee, Blake Bookstaff.

          Thomas R. Frierson, II, J., delivered the opinion of the court, in which D. Michael Swiney, C.J., and John W. McClarty, J., joined.

          OPINION

          THOMAS R. FRIERSON, II, JUDGE

         I. Factual and Procedural Background

         The plaintiff, Blake Bookstaff, was formerly a principal and shareholder of popularcategories.com ("PopCat"), a Florida corporation that was formed by Mr. Bookstaff and William Marquez in 2000. In 2001, PopCat and another Florida company, Compatible Technologies of Orlando, LLC, joined together to form Popular Enterprises, LLC ("Popular Enterprises"), a Florida limited liability company. Popular Enterprises operated an internet search engine and internet domain name aggregator. Mr. Bookstaff managed certain aspects of PopCat and Popular Enterprises from his place of business in Knoxville.

         Mr. Bookstaff later acquired Mr. Marquez's shares in PopCat, becoming PopCat's sole shareholder in 2005. In 2006, Popular Enterprises was sold to a third party. The proceeds from that sale were paid to PopCat in two installments, the first in 2006 and the second in 2007. Mr. Bookstaff has acknowledged in his appellate brief that the sale proceeds were then distributed to him as sole shareholder. Later in 2007, PopCat filed articles of dissolution with the Florida Secretary of State.

         Subsequently, the Department determined that the proceeds from the sale of Popular Enterprises were business earnings and that PopCat owed additional franchise and excise ("F&E") taxes for 2006 and 2007. On June 6, 2008, the Department issued a notice of assessment to PopCat of estimated unpaid F&E taxes for 2006, plus penalties and interest, for a total assessment in the amount of $899, 288.78. On February 15, 2009, the Department issued a notice of assessment to PopCat of estimated unpaid F&E taxes for 2007, plus penalties and interest, for a total assessment in the amount of $630, 515.23.

         In 2009, PopCat filed two lawsuits challenging these assessments in the Davidson County Chancery Court, which lawsuits were later consolidated. The Department filed counterclaims in each suit, seeking judgment against PopCat for the amount of the unpaid tax assessments. On March 22, 2017, the Davidson County Chancery Court entered an "Order and Final Judgment Pursuant to Tenn. R. Civ. P. 54.02, " which upheld the assessments and granted judgment on the Department's counterclaims in the amount of $2, 107, 691.54.[1] PopCat has appealed that ruling in a separate action. Mr. Bookstaff, individually, was not a party to the Davidson County lawsuits.

         On January 6, 2011, the Department "assessed" the unpaid F&E taxes owed by PopCat against Mr. Bookstaff personally, by letter notice. The Department asserted that all of the income received by PopCat had been distributed to Mr. Bookstaff and that PopCat was thereafter dissolved, resulting in Mr. Bookstaff's personal liability for the unpaid F&E taxes pursuant to Tennessee Code Annotated §§ 67-4-2016 and -2117.[2] In this letter, the Department instructed Mr. Bookstaff that he could request a conference to discuss the assessment. Mr. Bookstaff requested and the Department conducted an informal conference regarding the assessment pursuant to Tennessee Code Annotated § 67-1-1801(c)(3). The Department issued a written decision affirming the assessment against Mr. Bookstaff on November 21, 2016.

         The Department filed an action against Mr. Bookstaff to collect these taxes on January 5, 2017, in the Knox County Chancery Court. On January 18, 2017, before he was served with process in that lawsuit, Mr. Bookstaff initiated the instant action against the Department, in a different division of the Knox County Chancery Court ("trial court"), challenging the assessment levied against him personally and seeking an injunction prohibiting any attempts by the Department to collect. Mr. Bookstaff requested a temporary restraining order, which was granted. Following his receipt of service of process concerning the lawsuit filed by the Department, Mr. Bookstaff amended his complaint and sought an additional temporary restraining order, which was also granted by the trial court in the instant action.

         Following a hearing, the trial court granted Mr. Bookstaff's motion for an injunction in an order entered March 20, 2017. The court enjoined the Department from filing a lawsuit or levy against Mr. Bookstaff and directed the Department to cancel the 2011 assessment, which the court determined was not a new assessment but rather was an attempt to collect the earlier assessments against PopCat. The court determined, inter alia, that the Department could not collect on the assessments originally issued in 2008 and 2009 due to the six-year statute of limitations contained in Tennessee Code Annotated § 67-1-1429. The court also determined that Mr. Bookstaff was not a "person" or "taxpayer" subject to F&E tax because F&E taxes are assessed only against entities such as corporations. Finally, the court determined that Mr. Bookstaff had no personal liability for the taxes owed by PopCat absent proof of a fraudulent conveyance.

         The Department timely appealed.

         II. Issues Presented

         The Department presents the following issues for our review, which we have restated slightly:

1. Whether the trial court erred by determining that the six-year statute of limitations would bar any attempt by the Department to collect the tax represented by assessments previously made against PopCat from Mr. Bookstaff personally.
2. Whether the trial court erred by determining that a personal assessment against Mr. Bookstaff was not authorized by Tennessee Code Annotated §§ 67-4-2016(a) and -2117.
3. Whether the trial court erred by determining that Mr. Bookstaff could not be held personally liable for the tax represented by assessments against PopCat in the ...

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