Smith v. Atlantic Properties, Inc.

Louis Wolfson (defendant), Paul Smith, Abraham Zimble, and William Burke each owned 25 percent of the outstanding shares of Atlantic Properties, Inc. (Atlantic). Atlantic’s bylaws stated that no corporate action could be taken without an affirmative vote of 80 percent of the outstanding stock. This provision effectively meant that any decision could be vetoed by one of the four partners. When Atlantic began to turn a profit, Smith, Zimble, and Burke (plaintiffs) wanted to declare dividends. Wolfson, however, repeatedly voted against declaring dividends, instead wanting to devote the funds to repairs on the property. The plaintiffs agreed to devote a moderate amount of the funds to repairs, but maintained that declaring dividends was the correct approach. Eventually, Atlantic accumulated so much profit that they were in excess of the IRS limits, which provided that at a certain point of profit, corporations must declare dividends. Wolfson still refused to vote in favor of declaring dividends and because of the 80 percent provision, Atlantic was not able to do so. The IRS accordingly assessed penalties against Atlantic for seven straight years, with Wolfson still refusing to give in. After about four years of the IRS penalties, the plaintiffs brought suit, seeking reimbursement to Atlantic from Wolfson for the IRS penalties. The Massachusetts Superior Court found in favor of the plaintiffs, holding that Wolfson’s actions were based in part on a desire to avoid tax payments and that Wolfson failed to present a definite program for repairs that would satisfy an IRS inquiry into the dividend matter. Wolfson appealed.