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Cold Stone Explains Battle with IRS

SCOTTSDALE, Ariz. (Blue MauMau) - Last Tuesday, Joshua Becker, the senior vice president and assistant general counsel of Cold Stone Creamery alerted its franchise community of an article in the November/December issue of Franchise Times magazine by this reporter. Becker explained that the piece, Cold Reality: Ice Cream Franchise Takes on IRS, reported that Cold Stone had sued the Internal Revenue Service in federal court in Arizona surrounding the issuance of several levies on the properties of former franchisee and area developer Sean Brown. Becker states, "While the article was mostly accurate, there are several points that should be clarified." He also explained that since the article was submitted some time ago [October 8] several aspects of the lawsuit have changed. (Click on image to read original email, pdf)

Becker did not mention in his email that similar lawsuits had been filed in Texas and New Mexico regarding additional properties owned by Brown, who had been terminated in January 2007 for non-payment and non-compliance. In exercising its rights under the franchise and development agreements, Cold Stone took over all of Brown’s stores and assets. But Brown failed to pay certain federal taxes owed as part of the business, causing the IRS to levy the assets of his stores in all three states. After the government demanded payment of debt, Cold Stone entered into settlement talks with the government, hoping they could reach an agreement and avoid a lengthy trial. But the statute of limitations soon ran out and forced the company to file the litigation in February 2008, claiming wrongful levies. 

Becker clarified in his email that "there was never an allegation by the IRS in the litigation that CSC [Cold Stone Creamery] failed to pay any of its own taxes," and that the taxes at issue were those of Sean Brown. He further explained that the IRS claimed an interest in the intellectual property and development rights that had been licensed to the now terminated franchisee/area developer. Becker stated, "We strongly believe that the IRS cannot claim an interest in such rights and therefore, filed a suit against the IRS challenging its claims."  

Yesterday, Joshua Becker issued a statement addressing the issue:

"As noted in the article, the United States filed counterclaims in each action, alleging that the combined value of the tangible and intangible assets of the franchisee were in excess of approximately $1.5 million.  Cold Stone filed a Motion to Dismiss the United States’ counterclaims, setting forth multiple grounds on which the levies were invalid as against Cold Stone and also setting forth legal authority for the position that levies against certain intangible assets (such as the franchise rights and area developer rights in this case) are unenforceable as a matter of law.

After consideration of Cold Stone’s arguments contained in the Motion, the United States has dismissed all of its counterclaims.  Accordingly, the dispute is now fairly characterized as a lien priority dispute between various interested parties.  In order to reach a final resolution of all of these issues, Cold Stone is in the process of preparing an interpleader complaint that will include secured lenders and other interested parties, including the United States, to judicially determine the rights and priority of the various parties in the property of the former franchisee. The interpleader actions will be filed in all 3 jurisdictions shortly, and Cold Stone anticipates that the case should be resolved quickly." 

By legal definition, an interpleader is employed when two or more parties seek ownership of money or property that is held by a third party. Cold Stone currently has possession of the equipment on which the IRS has attached liens. It is now considered a lien priority dispute between creditors, which includes the IRS, Cold Stone Creamery, secured lenders and banks. Cold Stone will give the government the dollar amount of the equipment at replacement value. Then the court will decide who has senior priority to the value of the hard assets.

According to court documents in all three states, the U.S. District judge did grant on October 22 the party’s joint motions to dismiss the United States counterclaims without prejudice, that each will bear its own costs and attorney fees. But on October 24 in Arizona court, the judge issued an order on Stipulation and Joint Motion for Extension of Expert Deadlines, modifying the court's August 5 scheduling. It gives dates in 2009 for initial and rebuttal for expert disclosures and expert depositions. All other deadlines scheduled will remain in force. 

According to a spokesperson for the Department of Justice in Washington D.C., the three cases are currently in discovery. Although there had been orders dismissing the government's counterclaims dealing with the enforcement of the levies, he said the original complaints still stand. He also acknowledged Cold Stone had more litigation and tax problems than the DOJ normally sees with companies.  In May 2007, Cold Stone was acquired by Kahala Corp, (pdf) a franchise development and marketing firm in the quick-service restaurant sector. 

This current litigation with the Internal Revenue Service is not disclosed in Cold Stone's Franchise Disclosure Documents for 2008. In the Franchise Times article, Becker stated that based on his reading of the NASAA (pdf) guidelines, it does not need to be in the Franchise Disclosure Document.   

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About Janet Sparks

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Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.