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Law Educator, Esq.
Law Educator, Esq., Attorney
Category: Business Law
Satisfied Customers: 111456
Experience:  All corporate law, including non-profits and charitable fraternal organizations.
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GENERAL AREA: Internet domain name sale and related issues.

Customer Question

GENERAL AREA: Internet domain name sale and related issues. Nothing to do with the name or registering it..
I am considering the purchase of a 17 year old Internet domain/website and have 4 questions in two areas of concern
BACKGROUND
-- I am a knowledgeable, internet savvy entrepreneur.
-- I have been a member of the website for over 10 years and am very familiar with it
-- The seller is well known to me for many years.
-- Seller is about to get a major windfall of cash and property. So he is looking to get out and move on ... It's been 17 years
TRANSACTION RELATED INFO
-- Website is an escort advertising, review and discussion site.
-- Five years of verified gross annual revenues $200,000 +/- primarily from membership and advertising sales
-- Expenses virtually nonexistent ... Less than $300 a month ... For credit card processing fees and hosting
-- The website basically "runs itself" requiring less than an hour a day
-- Tremendous growth potential. The seller has not upgraded the software or done any marketing in several years.
-- $500K++++ / year realistic without much additional time or money for me
-- Sale price: $400,000 ... Heck of a bargain ... You will soon see why
SITUATION #1
-- The Corporation, a Nevada subchapter S is defunct for nonpayment state fees.
-- From 2005 - 2009 the seller sold shares to a total of six people. Three friends, One family member, and Two website members.
-- Total shares sold: Approx 35% of all shares
-- The single largest shareholder owns 20% ... Let's call him "Joe". He is a member of the website
-- Range of sales: $5K - $25K
-- The domain is the sole producing asset of the defunct corporation
-- The Share Sale Agreement stated that their investment was to fund the expansion of the site.
-- Profits from the existing local operations were exempt.
-- No dividends or profits have been disbursed to any of the shareholders
-- None of the shareholders have complained or even inquired about their investment for "several years" .. I believe this to be true
-- None of the shareholders know each other
-- The domain is currently registered in the seller's personal name
-- Up until recently it had been in the Corporation's name
*** The seller will not provide any specific information about any of the investors *** This is OK ... Since this is an escort site, he does not wish to compromise privacy. In this case anonymity is far more important here than on almost any other website type I can think of.
For various reasons .. that have nothing to do with the corporate mass ... we both agree not to announce the sale for at least six months .. Even to the shareholders
IMPORTANT DISTINCTION: Forgive me for stating the obvious but ... This transaction is the purchase of an asset of the corporation ... Not the Corporation
Let's say the sale completes without incident. I own the domain and am running the website just fine.
if upon learning of the sale one or more of the shareholders became disgruntled I can see how they might have a case against the seller.
QUESTION: Let's say I have not made any enhancements to the site. Would they have a WINNABLE cause of action against me? If so… For what?
QUESTION: Let's say I have successfully grown the site ... which the seller had been unable to do ... Could any of the shareholders then have a claim against me? If so… For what?
EXPERT LEVEL QUESTION: Could "Joe" somehow get ICANN to suspend the domain citing fraud or malfeasance ... or some other nasty thing?
SITUATION #2
-- The seller has indicated that he has "serious tax problems"
-- His tax problems extend beyond this Corporation
*** Seller claims that his recent windfall will allow him to solve his tax problems ... "soon" ***
*** Seller claims that the IRS is UNAWARE OF HIS PROBLEMS ... He has never been audited or even received a threatening letter. ***
*** He feels that his recent windfall will bite him on the ass once he shows up on the IRS's "radar" ***
BTW: He has promised to give the full disclosure on this in the day or two.
QUESTION: Let's say the impending windfall never materializes ... and / or ... the IRS just gets a bug up their ass about him ... could the domain be confiscated or otherwise negatively impacted well after the sale?
Remember: he claims he's not even in trouble yet. So this would be presumably many months down the road, if at all.
WORTH NOTING: None of the short tax forms I have ever seen ... including the W-2 forms from credit card processors ... ask for or list a website domain name or URL.
If we assume that the seller has either underreported income or not paid tax altogether, it makes me wonder if the IRS could readily "connect the dots" back to the Corporation unless the seller tells them.
IMPORTANT FYI:
-- $100,000 of the sale price will be kept in escrow for 6 - 12 months in case there are problems with the "title"
Submitted: 7 months ago.
Category: Business Law
Expert:  Law Educator, Esq. replied 7 months ago.

Thank you for your question. I look forward to working with you to provide you the information you are seeking for educational purposes only.


I know you said that the corporation is defunct, so this means as shareholders in the corporation they own a share of nothing. If the website was property in his personal name, the shareholders would not have a claim against the site, they may have a claim against your seller for fraud and would have to go against him for monetary damages, not you as new owner of the site that you purchased in good faith at reasonable market value in an arms length transaction. In other words, you are buying here from the owner of the site directly and that owner is not the corporation, so any claims shareholders may have would be against the corporation owner your seller and it would be for monetary damages, not against you as the new site owner.

As far as using ICANN to suspend the site, first Joe has to show ownership interest. The site was owned by your seller personally in his name, not in the name of the corporation and Joe only has rights against the corporation or its property here. If you provide proof you purchased the site in good faith for market value, then there is no fraud and his complaint is not through ICANN it is through civil court against your seller.

The IRS could have seized the site domain if that domain was in the seller's name. When a seller who has IRS issues sells property to a third party in a good faith transaction and market or near market value is received, the IRS cannot come back and try to take the property, they would have to pursue the money your seller received for the site, but not the site itself.

If the IRS has not already placed a lien on the domain then he can sell it and all the IRS can do is come after any money he received or is about to receive from the sale.


Customer: replied 7 months ago.

In general I am happy with your answers.

A couple of clarifications are called for:

SHAREHOLDERS, CORPORATE STATUS AND THE IRS

QUESTION: Does my having knowledge of the existence of the shareholders ... even though I don't know their names ... pose any problems for me potentially? Does having this knowledge create some sort of "tangential fiduciary responsibility"?

(Assuming that shareholder(s) somehow found out that I knew.)

PUT ANOTHER WAY ...

QUESTION: Since I know that the shareholders exist .... and ... that the seller is selling the primary asset of the now defunct corporation ... and ... I have reason to believe that the seller plans on pocketing the money and not distributing any of it to a shareholders ... then ... Does that put me in any jeopardy?

RELATED QUESTION: Similarly, if the IRS finds out that I knew there were "problems" beforehand could that in any way be problematic?

DOMAIN REGISTRATION: PERSONAL V. CORPORATE
(This is an important point that I meant to put in the original set of questions)

Two weeks ago, when I first learned of the corporate/shareholder issues I checked the WHOIS info. The ownership of the site listed the seller's personal name and the corporate name.

That was the first time I became concerned about the "title" being free and clear.

Within 24 hours of expressing these concerns to the seller he advised me that he had just removed the corporate name from the registration.

I'm not so sure that this is a good thing though.

"Joe" could argue that the transfer to the seller as an individual was fraudulent.

QUESTION: Now that I've peeled the onion a little further: How confident are you that ICANN would not have any cause of action against the domain name?

EXTRA CREDIT QUESTION: With regards ***** ***** IRS issues, can you cite me any applicable law that would assuage my concerns?

*** I would be happy to pay an extra fee if you find something good that is on point ***

JUST FOR LAUGHS

I feel that the seller has been very forthcoming on most things. When he started "coming clean" about the problems it became a little bit tougher to get some straight answers. Now that he's provided the answers to most of my questions, I regret asking some of them.

Ignorance would have been bliss

Expert:  Law Educator, Esq. replied 7 months ago.
Thank you for your replyYou said you are buying this site from him and the domain is in his personal name so you are not buying the corporation which is defunct, you are buying the domain name and are going to run it as your own new business. This means the shareholders and IRS can only go after him for the money, not you. Even though you may know the company has shareholders, you are not buying from the company and are buying it from him personally. Same with the IRS, you are paying him good and valuable reasonable money for the domain and site. They can go after the money from him that you paid him. If the corporate name is ***** ***** the site when you buy it, you are buying from him directly as his personal property. Any liability for this is on him, not you. They would have a legal action against him and seek to take any money you paid him if he is found to act inappropriately. As far as you are concerned, you would maintain you bought his personal property and as the corporation was defunct you had nothing to do with the corporation.

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