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November 28, 2005

Not for Glenn Hightower. Maybe he would have lost anyway, but you'd think for that kind of money you would want a lawyer involved.

Mr. Hightower was forced out of an S corporation in 2000 by his fellow shareholder under terms of a buy-sell agreement. He fought the buyout through arbitration and all the way to the State of Washington Supreme Court. He lost and was forced to live with the $41.5 million buyout price.

He didn't pay tax on either the buyout or his share of the 2000 S corporation income. This required him to make two seemingly contradictory agruments:

1. He didn't sell the stock, but
2. he didn't own it.

Judge Colvin couldn't get his brain around the contradiction. He ruled that Mr. Hightower had to pay tax on the $41.5 million sales price for the stock when he was paid for it, even though he didn't want the money:

Petitioner contends that under the claim of right doctrine the payments are not taxable to him in the years he received them because he opposed the stock buyout, he established a separate, interest-bearing account to hold the payments, and he did not use the funds during the years in issue. Contrary to petitionerís contention, a payment properly made to a taxpayer is includable in income in the year paid if, as here, the taxpayer (a) receives and deposits the payment in an unrestricted account, (b) seeks to invalidate the transaction or circumstance which caused the payment to be made, and (c) has no fixed obligation to pay the amount to another party. In addition, a taxpayer is taxable in the year the taxpayer receives wages where the taxpayer tried to return the wages to her employer and the employer refused to accept repayment. (Citations omitted.)

Mr. Hightower also had to pick up his share of income for the portion of the year preceding the buyout, even though he was locked out of the building by the other shareholder:

...petitioner has cited no authority for the proposition that a record owner of S corporation stock is not subject to pass through of S corporation income because the record owner has a diminished role in the corporation as a result of having a poor relationship with another shareholder.

Now nothing in the opinion indicates any blunder that lost Mr. Hightower the case that a lawyer would have prevented. Still, the case hinged on the application of tax law to the results of a lawsuit. This seems like deep water for a non-lawyer to swim in. But Mr. Hightower, while out almost $8 million in taxes, at least isn't out the legal fees.

Cite: Glenn Hightower, T.C. Memo. 2005-274.

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