Shirley and Roger Bailey owned Rig-Up Electrical Services, Inc. in Arkansas. They were considering retirement in 2007 and left their son Jeffrey in charge of managing the company. In 2008, Jeffrey started a new company called Rig-Up Services, LLC and wanted to buy the assets of the parent’s company.
Jeffrey hired Roy Johnson as the chief financial officer of the new company. Then Harris Arthur, a CPA, was engaged to review the financial records of the parent’s company and to give a report.
Arthur noticed the computer software program showed payroll taxes were paid to IRS but the bank records didn’t show the payments. He found the parent’s company owed more than $1 million in unpaid payroll taxes.
Mrs. Bailey received IRS notices to file the returns. She sent the second notice to Jeffrey. He assured her he had taken care of the problem.
In August 2008, the parents and Jeffrey (the son) signed an asset purchase agreement for the assets of the parent’s company. The price was $4 million when the market price was $12 million. It wasn’t mentioned if gift tax returns were filed. Soon after the sale, the CPA, Arthur, sent a letter to Mrs. Bailey explaining taxes had been withheld from employee’s wages, but weren’t paid to IRS. That was a surprise to her and a dispute began about who was responsible for paying IRS.
District and Appeals Courts got involved. It was finally found Jeffrey fraudulently induced the sale. The parents said they wouldn’t have sold for such a big discount if they knew of the taxes owed.
Jeffrey argued there was no evidence he knew about the unpaid taxes before the sale. But the court found evidence he did know about the tax problem before the sale. Arthur, the CPA, testified he discussed the problem with Jeffrey and Johnson twice before the sale. The court found Mrs. Bailey didn’t have an equal opportunity to learn of the nonpayment. Johnson directed Arthur to not tell her of the problem.
The Fifth Circuit Court sent the problem back to the district court to allow the Baileys and their company to decide whether to cancel the sale or to agree to the sale and sue to recover the damages they suffered.
It all sounds like a television program could be done on this matter. What a shame the son took advantage of his parents that way.
Perhaps one of the lessons here is to consult with an attorney on sale of business assets and to have duties of full disclosure clearly stated.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.