An order recharacterizing Ms. Read's motion as a motion for partial summary judgment and granting it will be issued, and decision will be entered for petitioner in docket No. 19001-97.
An order denying Mr. Read's and MMP's motion will be issued.
W and H, who were married, owned all of the voting, and
virtually all of the nonvoting, stock of X corporation (X). They
divorced, and the final judgment dissolving their marriage
(divorce judgment) ordered (1) that W sell and convey to H, or
at H's election to X or X's ESOP plan, all of her X stock, (2)
that H, or at H's election X or X's ESOP plan, pay a stated
amount of cash to W simultaneously with the sale and conveyance
of such stock, and (3) that as additional consideration H, or at
H's election X or X's ESOP plan, deliver to W a promissory note
bearing 9-percent interest for the balance of the purchase price
of that stock. Pursuant to the divorce judgment, H elected that
the sale and conveyance of all of W's X stock be made to X,
instead of to H, (2) that X, instead of H, pay the stated amount
of cash to W simultaneously with that sale and conveyance, and
(3) that X, instead of H, issue a promissory note 2000 U.S. Tax Ct. LEXIS 2">*3 to W bearing
9-percent interest for the balance of the purchase price.
Thereafter, pursuant to H's election under the divorce judgment,
W sold and transferred to X, instead of to H, all of the X stock
that she owned.
be recognized on a transfer of property by an individual to a
spouse or a former spouse but only if the transfer to the former
spouse is incident to the divorce.
1984), addresses a transfer of property by a spouse
(transferring spouse) to a third party on behalf of a spouse or
former spouse (nontransferring spouse). Provided that the other
requirements of that temporary regulation and
are satisfied, Q&A-9 treats such a transfer as a transfer of
property by the transferring spouse directly to the
nontransferring spouse that qualifies for nonrecognition
treatment under
the property by the nontransferring spouse to the third party in
a transaction that does not qualify for nonrecognition treatment
under
Petitioners 2000 U.S. Tax Ct. LEXIS 2">*4 argue that the legal standard that must be
applied in order to determine whether W's transfer of her X
stock to X was a transfer to a third party on behalf of H within
the meaning of Q&A-9 is the primary-and-unconditional-obligation
standard established by constructive-dividend decisional law.
However, they disagree as to whether the primary-and-
unconditional-obligation standard is satisfied as to Mr. Read in
the instant cases.
1. HELD: The primary-and-unconditional-obligation standard
is not an appropriate standard to apply in order to determine
whether W's transfer of her X stock to X was a transfer of
property by W to a third party on behalf of H within the meaning
of Q&A-9. HELD, FURTHER, the primary-and-unconditional-
obligation standard is not an appropriate standard to apply in
any case involving a corporate redemption in a divorce setting
in order to determine whether the transfer of property by the
transferring spouse to a third party is on behalf of the
nontransferring spouse within the meaning of Q&A-9.
2. HELD, FURTHER, applying the common, ordinary meaning of
the phrase "on behalf of" in Q&A-9, W's transfer of her X stock
to 2000 U.S. Tax Ct. LEXIS 2">*5 X was a transfer of property by W to a third party on behalf
of H within the meaning of that temporary regulation. HELD,
FURTHER, pursuant to
recognized by W as a result of that transfer.
114 T.C. 14">*16 OPINION
CHIECHI, JUDGE: These cases are before us on cross-motions for partial summary judgment filed by Carol M. Read (Ms. Read) and by William A. Read (Mr. Read) and Mulberry Motor Parts, Inc. (MMP). 22000 U.S. Tax Ct. LEXIS 2">*6 (We shall refer to the motion for partial summary judgment filed by Ms. Read as Ms. Read's motion, to the motion for partial summary judgment filed by Mr. Read and MMP as Mr. Read's and MMP's motion, and collectively to those two motions as the cross-motions for partial summary judgment.)
A partial summary adjudication may be made that does not dispose of all the issues in a case if, inter alia, it is shown that there is no genuine issue as to any material fact with respect to the question(s) on which partial summary adjudication is sought. See Rule 121(b). 3 We are in agreement with the parties that there are no genuine issues of material fact and that the facts material to the Court's disposition of the cross- motions for partial summary judgment are set forth in those paragraphs of the stipulation of facts and those exhibits attached to that stipulation, which the Court made part of the record in these cases on November 5, 1998.
At the time they filed their respective petitions, Ms. Read resided in San Francisco, California, Mr. Read resided in Lakeland, 2000 U.S. Tax Ct. LEXIS 2">*7 Florida, and MMP's principal place of business was in Bartow, Florida.
In 1985, Ms. Read filed a petition for dissolution of her marriage to Mr. Read (marriage dissolution action) in the Circuit Court of the Tenth Judicial Circuit of the State of Florida, Polk County (Florida court). At the time she filed that petition, Ms. Read owned 1,200 shares of voting and 114 T.C. 14">*17 12,000 shares of nonvoting, and Mr. Read owned 1,300 shares of voting and 13,000 shares of nonvoting, common stock of MMP, a corporation engaged in the business of selling automobile parts.
During the trial in the marriage dissolution action, Ms. Read and Mr. Read reached an oral settlement agreement (marital settlement agreement) which was read into the record in that action on December 5, 1985. The marital settlement agreement provided in pertinent part:
Wife [Ms. Read] agrees to convey to husband [Mr. Read] all of
her stock in Mulberry Motor Parts, both voting and non-voting.
And for such stock, husband, or at his option, Mulberry Motor
Parts or the Aesop [sic] plan of Mulberry Motor Parts agrees to
purchase such stock at its appraised value of $ 838,724, such
purchase to be closed within 60 days of this date 2000 U.S. Tax Ct. LEXIS 2">*8 and to be paid
as follows:
First, $ 200,000 down to be paid in cash * * * the
balance of $ 638,724 to be evidenced by promissory note, to be
signed by the purchaser but if the purchaser is other than
William A. Read, to be guaranteed by William A. Read, and
bearing interest at the rate of nine percent, payable monthly,
on the principal, due from time to time; and with the principal
to be payable $ 50,000 after twelve months and $ 50,000 principal
each year thereafter until the principal is paid in full, with
the right of prepayment at any time without penalty, and such
purchase to be secured by a security interest in the stock to be
sold, but with husband retaining a full right so long as he is
in compliance and not in default on such note, to control such
stock and to vote it.
* * * * * * *
* * * Husband agrees to pay the wife as permanent periodic
alimony the sum of $ 2,500 per month and continuing until the
death of the wife, the death of the husband, the remarriage of
wife or wife's cohabitation with another man to whom she is not
related by blood or marriage on a continuing basis for 60 days
or more. * * *
* 2000 U.S. Tax Ct. LEXIS 2">*9 * * * * * *
* * * Additionally provided, however, that such alimony
shall increase in amount from $ 2,500 per month to $ 3,000 per
month at such time as the final principal payment is made by
husband on the stock purchase called for on the Mulberry Motor
Parts stock.
* * * * * * *
* * * The temporary alimony in the amount of $ 6,000 * * *
the December payment of which has already been made, will
terminate and no longer be payable in the event that husband
pays the down payment on the stock purchase or causes it to be
paid by either Mulberry Motor Parts or the Aesop [sic] plan and
pays the consideration for the conveyance of the house and the
$ 100,000 lump sum alimony on or before December 31st, 1985.
114 T.C. 14">*18 However, if husband fails to do so in whole or in part, the
$ 6,000 temporary alimony will continue for the month of January,
subject to termination only upon the death of the wife.
* * * * * * *
* * * Additionally, as part of the temporary support
agreement, but for consideration in addition furnished by the
wife, husband has agreed to maintain in force insurance on his
life with death benefits payable to wife in 2000 U.S. Tax Ct. LEXIS 2">*10 the amount of
$ 150,000, and continuing for a period of time that was
ascertainable but uncertain.
Parties agree that so long as William A. Read owes to his
wife any amount of principal on the stock purchase of Mulberry
Motor Parts, he will maintain that insurance in force with her
as beneficiary with [sic] the death benefits thereof, having the
right to cancel such designation when the stock is paid in full.
In the event, however, of his death prior to payment of the
stock purchase in full, the insurance proceeds will apply toward
the balance then due and owing.
On December 30, 1985, the Florida court entered the divorce judgment dissolving the marriage. The divorce judgment ordered and adjudged in pertinent part that:
1. The marriage of Husband, WILLIAM A. READ, and Wife,
CAROL ELIZABETH READ, is hereby dissolved.
2. The Marital Settlement Agreement dictated into the
record before the Court on December 5, 1985, is ratified and
approved by this Court and the parties are ordered to comply
with all terms of that Agreement.
3. Wife shall sell and convey to Husband, or at Husband's
election to Mulberry Motor Parts, Inc., or the ESOP Plan of
2000 U.S. Tax Ct. LEXIS 2">*11 Mulberry Motor Parts, Inc., all of the outstanding stock which
she holds in Mulberry Motor Parts, Inc., consisting of 1,200
shares of voting stock and 12,000 shares of non-voting stock by
February 5, 1986. As consideration, Husband, or at his election
Mulberry Motor Parts, Inc., or the ESOP Plan of Mulberry Motor
Parts, Inc., shall pay to Wife simultaneously with the
conveyance of such shares, the sum of $ 200,000. As additional
consideration, Husband, or at his election Mulberry Motor Parts,
Inc., or the ESOP Plan of Mulberry Motor Parts, Inc., shall
deliver to Wife a promissory note in the principal amount of
$ 638,724, which sum represents the balance of the purchase price
to be paid for the stock. The note shall bear interest at the
rate of 9%, which interest shall be payable monthly beginning
one (1) month after the date of the note. The principal of the
note shall be paid at the rate of $ 50,000 per year, the first
payment shall be made twelve (12) months following the date of
the note, and each year thereafter until the note is paid in
full.
Husband or Mulberry Motor Parts, Inc., or the ESOP Plan of
Mulberry Motor Parts, Inc., as the case 2000 U.S. Tax Ct. LEXIS 2">*12 may be, shall have right
of prepayment without penalty. The note delivered to Wife shall
be personally guaranteed by Husband.
114 T.C. 14">*19 The sale of the stock by Wife and the unpaid balance for
the purchase of the stock by Husband shall be secured by a
security interest in the stock to be sold for which payments has
[sic] not been made, with Husband retaining the full right to
vote said stock and control said stock so long as he is in
compliance with the terms of this paragraph. The amount of the
security interest shall reduce pro rata as principal payments
are made.
* * * * * * *
8. Husband has been paying the sum of $ 6,000 per month as
temporary alimony to Wife. Husband's obligation to pay temporary
alimony shall terminate on the 1st of the month following the
month in which Husband completes the payment on the down payment
on the stock purchase plan in the amount of $ 200,000 and pays
the lump sum alimony in the amount of $ 180,000. The permanent,
periodic alimony as provided for in paragraph 9 shall begin the
lst of the month following the payment of such items. Husband's
obligation to pay temporary alimony is subject to prior
termination 2000 U.S. Tax Ct. LEXIS 2">*13 upon the death of Wife.
9. Husband shall pay to Wife as and for permanent, periodic
alimony, the sum of $ 2,500 per month until the death of Wife,
the death of Husband, Wife's remarriage or until Wife cohabits
with a man to whom she is not related by blood or marriage on a
continuing basis for at least sixty (60) days, whichever first
occurs. On the lst of the month following the final payment to
Wife by Husband of the total consideration owed to her by reason
of the transfer of her stock in Mulberry Motor Parts, Inc., such
alimony shall increase to the sum of $ 3,000 per month. These
provisions for permanent, periodic alimony provided in this
paragraph of this Final Judgment shall not be subject to
modification by either party, both parties have expressly waived
all right to seek modification of the amounts and terms under
which permanent, periodic alimony is payable.
* * * * * * *
11. Husband shall maintain on his life with Wife as
beneficiary, life insurance having death benefits in the amount
of $ 150,000. Husband's obligation to continue insurance for the
benefit of Wife shall terminate upon the payment in full of the
purchase 2000 U.S. Tax Ct. LEXIS 2">*14 price of the stock in Mulberry Motor Parts, Inc.
At some time on or after December 30, 1985, the date on which the divorce judgment was entered, and on or prior to February 5, 1986, Mr. Read elected pursuant to the divorce judgment (1) that the sale and conveyance by Ms. Read of all of her MMP stock be made to MMP, instead of to Mr. Read, (2) that MMP, instead of Mr. Read, pay $ 200,000 to Ms. Read simultaneously with her sale and conveyance of such stock to MMP, and (3) that MMP, instead of Mr. Read, issue a promissory note to Ms. Read in the principal amount of $ 638,724 and bearing 9-percent interest.
114 T.C. 14">*20 On February 5, 1986, the board of directors of MMP, composed of Mr. Read, Ms. Read, and J.S. Huggart, Jr., executed a document entitled "ACTION BY WRITTEN CONSENT OF THE BOARD OF DIRECTORS OF MULBERRY MOTOR PARTS, INC." with respect to the foregoing election that Mr. Read made pursuant to the divorce judgment (MMP board action by written consent). 42000 U.S. Tax Ct. LEXIS 2">*15 The MMP board action by written consent stated in pertinent part:
We, the undersigned, constituting all of the members of the
Board of Directors of Mulberry Motor Parts, Inc., * * * do
hereby take the following action by unanimous written consent,
pursuant to the provisions of
RESOLVED, that it is advisable and in the best
interest 2000 U.S. Tax Ct. LEXIS 2">*16 of the Corporation that the Corporation purchase
1,200 shares of its outstanding voting common capital stock
and * * * 12,000 shares of its outstanding nonvoting
common capital stock from Carol E. Read for a purchase
price of $ 838,724.00. The officers of the Corporation are
hereby directed to repurchase such stock in accordance with
the terms of the certain Stock Purchase Agreement dated
February 5, 1986 * * *. The appropriate officers of
the Corporation are hereby authorized and directed to
execute and deliver on behalf of the Corporation such
Agreement, the Installment Promissory Note and Stock Pledge
Agreement (referred to in such Agreement) and any other
documents necessary to consummate such transaction. The
repurchased shares which are not subject to the Stock
Pledge Agreement shall be retired on the books of the
Corporation. As shares which are subject to the Stock
Pledge Agreement are released, such shares shall be retired
on the books of the Corporation.
On February 5, 1986, pursuant to Mr. Read's election under the divorce judgment, MMP and Ms. Read entered into the stock purchase agreement (stock purchase 2000 U.S. Tax Ct. LEXIS 2">*17 agreement) that was authorized in the MMP board action by written consent. That agreement provided in pertinent part:
WHEREAS, Stockholder [Ms. Read] owns certain shares of the
common capital stock of the Corporation [MMP];
114 T.C. 14">*21 WHEREAS, Stockholder wishes to sell all of her common
capital stock of the Corporation to the Corporation, which
wishes to purchase such stock.
NOW, THEREFORE, the parties agree as follows:
1. Sales and Purchases of Stock. Simultaneously with the
execution of this Agreement, Stockholder shall sell, and the
Corporation shall redeem and purchase One Thousand Two Hundred
(1,200) shares of voting stock of the Corporation and Twelve
Thousand (12,000) shares of nonvoting common stock of the
Corporation.
2. Purchase Price. The purchase price for the stock
redeemed by the Corporation shall be Eight Hundred Thirty- Eight
Thousand Seven Hundred Twenty-Four Dollars ($ 838,724.00), such
price to be paid in the following manner:
(a) Down payment. The Corporation shall pay Two
Hundred Thousand Dollars ($ 200,000.00) in cash upon
delivery of the purchased stock by Stockholder.
(b) Installment Promissory Note. The 2000 U.S. Tax Ct. LEXIS 2">*18 Corporation shall
deliver to Stockholder an Installment Promissory Note for
Six Hundred Thirty-Eight Thousand Seven Hundred Twenty-Four
Dollars ($ 638,724.00), (the "Note"), executed by the
appropriate officers of the Corporation and individually
guaranteed by William A. Read, upon delivery of the
purchased stock by Stockholder. Such Note shall be in the
form attached hereto as Exhibit A.
(c) Collateral Security. To secure the payment of the
Note, 10,482 shares of the nonvoting common capital stock
redeemed by the Corporation shall be pledged by assignment
as collateral security to the Stockholder in accordance
with a Stock Pledge Agreement to be executed by the
Stockholder and the Corporation contemporaneously with the
Note. Such Stock Pledge Agreement shall be in the form
attached hereto as Exhibit B.
Pursuant to Mr. Read's election under the divorce judgment, on February 5, 1986, Ms. Read transferred to MMP her 1,200 shares of voting, and 12,000 shares of nonvoting, common stock of MMP (Ms. Read's February 5, 1986 transfer of MMP stock); MMP paid Ms. Read $ 200,000 by check; and MMP issued to Ms. Read an installment promissory 2000 U.S. Tax Ct. LEXIS 2">*19 note in the amount of $ 638,724 and bearing 9-percent annual interest (installment promissory note). That note provided in pertinent part:
FOR VALUE RECEIVED, the undersigned [MMP] promises to pay
to the order of CAROL E. READ the principal sum of Six Hundred
Thirty-Eight Thousand Seven Hundred Twenty-Four and No/100ths
Dollars ($ 638,724.00), together with interest thereon from
February 5, 1986, at the rate of nine per cent (9%) per annum.
Interest on the unpaid principal balance shall be payable in
equal monthly installments, commencing on March 5, 1986, and
continuing on the fifth day of each month thereafter until the
principal sum and interest have been fully paid. Principal shall
be payable in annual installments of Fifty Thousand and
No/100ths Dollars 114 T.C. 14">*22 ($ 50,000.00) each, commencing on February 5,
1987, and continuing on the fifth day of February of each year
through 1998, with a final installment of Thirty-Eight Thousand
Seven Hundred Twenty-Four and No/100ths Dollars ($ 38,724.00) due
on February 5, 1999. * * *
* * * * * * *
The undersigned hereby waives presentment for payment,
notice of nonpayment, protest and notice of 2000 U.S. Tax Ct. LEXIS 2">*20 protest of this
note.
The installment promissory note was signed by William A. Read as president of MMP. Immediately beneath that signature appeared the following guaranty by Mr. Read in his individual capacity, which he signed on February 5, 1986:
INDIVIDUAL GUARANTY
The undersigned [Mr. Read] hereby individually
unconditionally guarantees the payment of all sums due under
this Installment Promissory Note.
The individual guaranty by Mr. Read of MMP's installment promissory note expressed in unambiguous terms an unconditional guaranty of Mr. Read. Consequently, under Florida law, that guaranty is what is known as an absolute guaranty, see
The stock pledge agreement referred to in and attached to the stock purchase agreement was entered 2000 U.S. Tax Ct. LEXIS 2">*21 into on February 5, 1986 (stock pledge agreement). The stock pledge agreement provided in pertinent part:
WHEREAS, Pledgor [MMP] is indebted to Pledgee [Ms. Read] in
the amount of Six Hundred Thirty-Eight Thousand Seven Hundred
Twenty-Four and NO/100th Dollars ($ 638,724.00) as evidenced by
that certain promissory note from Pledgor to Pledgee dated
February 5, 1986 [installment promissory note] * * * and
WHEREAS, Pledgor owns 10,482 shares of its nonvoting common
capital stock which it holds in its treasury and which it has
purchased from Pledgee; and
WHEREAS, Pledgor, as the owner of the above stock, agrees
that it shall be pledged to Pledgee as security for the
repayment of such indebtedness.
NOW, THEREFORE, the parties agree as follows:
114 T.C. 14">*23 1. Pledge. Pledgor hereby grants to Pledgee a security
interest in 10,482 shares of its nonvoting common capital stock
* * *. Pledgee shall hold the pledged shares as security
for the repayment of the indebtedness described above and shall
not encumber or dispose of such shares, except in accordance
with the provisions of paragraph 7 of this Agreement.
2. Term. The shares pledged hereunder shall 2000 U.S. Tax Ct. LEXIS 2">*22 remain so
pledged to Pledgee until released in accordance with the
provisions of paragraph 3 of this Agreement.
3. Release of Stock.
(a) Upon each principal payment in the amount of Fifty
Thousand and No/100th Dollars ($ 50,000.00) in accordance
with the terms of * * * [installment promissory
note], Pledgor shall be entitled to the release from this
Stock Pledge Agreement of 820 shares of non-voting common
stock. Upon the demand at any time of Pledgor, Pledgee
shall deliver to Pledgor the stock certificate for
reissuance of such released shares, and Pledgor shall issue
and deliver to Pledgee a new certificate representing the
shares which remain subject to the pledge.
(b) Upon the repayment in full with interest of the
indebtedness in accordance with the terms of * * *
[installment promissory note], Pledgee shall transfer to
Pledgor all of the remaining stock pledged hereunder.
* * * * * * *
7. Default. If Pledgor defaults in the performance of any
of the terms of this Agreement or if Pledgor defaults in the
payment of the indebtedness described in * * * [installment
promissory note], then Pledgee 2000 U.S. Tax Ct. LEXIS 2">*23 shall have the following options
exercisable at any time following thirty (30) days after any
such default:
(a) Pledgee may declare the unpaid balance of the
indebtedness immediately due and payable and then sell the
pledged shares. * * *
* * * * * * *
Pledgee shall thereafter account to Pledgor for any surplus
proceeds, which shall be paid over to Pledgor. Pledgor
shall remain liable to Pledgee for any deficiency. * * *
(b) Pledgee may declare the unpaid balance of
indebtedness immediately due and payable and retain the
pledged shares in satisfaction of Pledgor's obligations
under * * * [installment promissory note] and under
this Agreement. * * *
(c) Pledgee may declare the unpaid balance of
indebtedness immediately due and payable and thereafter
exercise all rights and remedies afforded a secured party
under the provisions of the Uniform Commercial Code in
force in Florida as of the date of this Agreement.
Since February 5, 1986, Mr. Read has owned 100 percent of the outstanding voting common stock of MMP. At the time of Ms. Read's February 5, 1986 transfer of MMP stock and during the years 2000 U.S. Tax Ct. LEXIS 2">*24 at issue, MMP's ESOP owned 4,961 shares of class B nonvoting common stock of MMP.
114 T.C. 14">*24 MMP classified the installment promissory note as a liability on its balance sheet for each of the years 1988, 1989, and 1990. Pursuant to that note, MMP made the following payments of principal and interest to Ms. Read during the years indicated:
1988 1989 1990
Principal $ 50,000 $ 50,000 $ 50,000
Interest 49,235 44,735 40,235
MMP deducted the interest payments that it made to Ms. Read during each of the years 1988, 1989, and 1990 in its Federal income tax (tax) return for each of those years.
Ms. Read did not report any income with respect to her transfer of MMP stock to MMP, except for the interest payments under the installment promissory note that MMP made to her during 1988, 1989, and 1990. She reported those interest payments as interest income in her tax returns for those years.
Mr. Read did not report in his tax returns for 1988, 1989, and 1990 any income with respect to Ms. Read's February 5, 1986 transfer of MMP stock.
Respondent determined in the notice issued to Ms. Read for 1989 and 1990 5 that the principal payment under the installment promissory note 2000 U.S. Tax Ct. LEXIS 2">*25 that MMP made to her during each of those years constitutes long-term capital gain. 6 Respondent made no determinations in that notice with respect to the interest payments under the installment promissory note that Ms. Read reported as interest income in her returns for those years.
Respondent determined in the notice issued to Mr. Read for 1988, 1989, and 1990 that the principal and interest payments under the installment promissory note that MMP made to Ms. Read during those years are constructive dividends to Mr. Read.
Respondent determined in the notice issued to MMP for 1988, 1989, and 1990 that the interest payments under the installment promissory note that it made to Ms. Read during those years are not deductible.
114 T.C. 14">*25 The underlying common issue presented in the cross-motions for partial summary judgment is whether
DIVORCE.
(a) General Rule. -- No gain or loss shall be recognized on
a transfer of property from an individual to (or in trust for
the benefit of) --
(1) a spouse, or
(2) a former spouse, but only if the transfer is
incident to the divorce.
(b) Transfer Treated as Gift; Transferee Has Transferor's
Basis. -- In the case of any transfer of property described in
subsection (a) --
(1) for purposes of this subtitle, the property shall
be treated as acquired by the transferee by gift, and
(2) the basis of the transferee in the property shall
be the adjusted basis 2000 U.S. Tax Ct. LEXIS 2">*27 of the transferor.
(c) Incident to Divorce. -- For purposes of subsection
(a)(2), a transfer of property is incident to the divorce if
such transfer --
(1) occurs within 1 year after the date on which the
marriage ceases, or
(2) is related to the cessation of the marriage.
Temporary, but not final, regulations have been issued under
The temporary 2000 U.S. Tax Ct. LEXIS 2">*28 regulations under
Q-9. May transfers of property to third parties on behalf
of a spouse (or former spouse) qualify under
A-9. Yes. There are three situations in which a transfer of
property to a third party on behalf of a spouse (or former
spouse) will qualify under
requirements of the section are satisfied. The first situation
is where the transfer to the third party is required by a
divorce or separation instrument. The second situation is where
the transfer to the third party is pursuant to the written
request of the other spouse (or former spouse). The third
situation is where the transferor receives from the other spouse
(or former spouse) a written consent or ratification of the
transfer to the third party. * * * In the three situations
described above, the transfer of 2000 U.S. Tax Ct. LEXIS 2">*29 property will be treated as
made directly to the nontransferring spouse (or former spouse)
and the nontransferring spouse will be treated as immediately
transferring the property to the third party. The deemed
transfer from the nontransferring spouse (or former spouse) to
the third party is not a transaction that qualifies for
nonrecognition of gain under
Ms. Read contends that her transfer of MMP stock to MMP was a transfer of property by her to a third party on behalf of Mr. Read within the meaning of Q&A-9 and that that transfer fits within both the first situation and the second situation described in that temporary regulation. Consequently, according to Ms. Read,
In advancing their respective positions, Ms. Read and Mr. Read and MMP argue that
We disagree with petitioners that
The 2000 U.S. Tax Ct. LEXIS 2">*32 only issue that we decided in
Respondent has indicated to the Court that, if we find that
Mr. Hayes received a constructive dividend in connection with
JRE's undertaking to redeem Ms. Hayes' stock, as we have done,
she will concede that
recognition of gain on the amount realized from the exchange of
her stock. ACCORDINGLY, UNDER RESPONDENT'S CONCESSION, OUR
RESOLUTION OF THE CONSTRUCTIVE DIVIDEND ISSUE IN MR. HAYES' CASE
RENDERS THE
606; emphasis added.]
We did not decide any issue in Hayes under Q&A-9 and
Similarly, the only issue that we decided in
v.
whether there is a constructive dividend to petitioner [Mr.
Arnes]. That case concerned the tax consequences to Joann [Ms.
Arnes] under
a party in Arnes [v.
possibly adverse position to petitioner in that case. 12
On the facts presented, we found that Mr. Arnes did not have a primary and unconditional 2000 U.S. Tax Ct. LEXIS 2">*36 obligation 13 to buy Ms. Arnes' Moriah stock at the time Moriah redeemed it. Consequently, we held that Mr. Arnes did not receive a constructive dividend as a result of that redemption. See
The only reported opinion of this Court in which we decided whether a transfer of property by a transferring spouse to a third party was on behalf of the nontransferring spouse within the meaning of Q&A-9 is
IT IS FURTHER ORDERED and ADJUDGED that the parties, being equal
stockholders, shall cause Phyllograph 2000 U.S. Tax Ct. LEXIS 2">*37 Corp. to redeem
plaintiff's [Ms. Blatt's] stock in said Corporation * * *
for the sum of Forty-five Thousand Three Hundred Eighty-four
Dollars * * *. [Id. n.4.]
Pursuant to that divorce decree, Phyllograph redeemed all of Ms. Blatt's Phyllograph stock in exchange for cash. See
In
the record in the instant case is devoid of evidence disproving
respondent's determination that petitioner's [Ms. Blatt's]
transfer of her stock to corporation [Phyllograph] 2000 U.S. Tax Ct. LEXIS 2">*41 was not on
behalf of [Mr.] Blatt within the meaning of Q&A 9. The
redemption, in form, was a transaction between petitioner and
corporation; she transferred her stock to corporation in
exchange for its appreciated value in cash. * * * [Id. at
81.]
We did not decide in
114 T.C. 14">*33 We have rejected petitioners' reliance on
114 T.C. 14">*34 In arguing that only satisfaction of the primary-and- unconditional-obligation standard as to Mr. Read may satisfy the on- behalf-of standard in Q&A-9, petitioners seem to be suggesting that that temporary regulation requires only that there be a transfer of property on behalf of the nontransferring spouse (here Mr. Read), regardless who is making the transfer of property and to whom such property is transferred. Petitioners thus reverse the on-behalf-of standard in Q&A-9 to read as follows: A transfer of property by a third party to the transferring spouse on behalf of the nontransferring spouse. 21 However, Q&A-9 does 2000 U.S. Tax Ct. LEXIS 2">*48 not read that way and does not address such a transfer. Q&A-9 addresses and requires a transfer of property by a transferring spouse to a third party on behalf of the nontransferring spouse. 22
The 2000 U.S. Tax Ct. LEXIS 2">*49 primary-and-unconditional-obligation standard does not require analysis of (or even address) the transfer that Q&A-9 requires be analyzed in order to determine whether that temporary regulation applies (provided that the other requirements of Q&A-9 and
The judicially created primary-and-unconditional- obligation standard is well established in the tax law. If in issuing Q&A-9 the Treasury Department had intended that in the case of, and solely in the case of, a corporate redemption in a divorce setting the on- behalf-of standard may be satisfied only by satisfaction of the primary-and-unconditional-obligation standard, the Treasury Department would have expressly so indicated in Q&A-9. It did not.
We have rejected petitioners' argument in these cases that only if the primary-and-unconditional-obligation standard is met as to Mr. Read may the on-behalf-of standard in Q&A-9 be satisfied. We shall now determine whether Ms. Read's transfer of her MMP stock to MMP was a transfer of property by the transferring spouse (Ms. Read) to a third party (MMP) on behalf of the nontransferring spouse (Mr. Read) within the meaning of Q&A-9. We shall make that determination 2000 U.S. Tax Ct. LEXIS 2">*52 by applying the meanings of the phrase "on behalf of" in Q&A-9 which we cited with approval and on which we relied in
We shall turn first to whether Ms. Read's transfer of her MMP stock to MMP satisfied a liability or an obligation of Mr. Read, one of the ways in which we indicated in
We shall now determine whether under the common, ordinary meaning of the phrase "on behalf of" which we cited with approval and on which we relied in
We shall now consider whether Ms. Read's February 5, 1986 transfer of MMP stock qualifies as one of the three situations described in Q&A-9. The first situation in Q&A-9 describes a transfer of property by the transferring spouse to a third party on behalf of the nontransferring spouse that is required by a divorce or separation instrument. We hold that Ms. Read's transfer of her MMP stock to MMP was required by the divorce judgment and fits within the first situation 114 T.C. 14">*38 described in Q&A-9. Although that transfer was required by the divorce judgment only in the event that Mr. Read elected that Ms. Read transfer her MMP stock to MMP, instead of to Mr. Read, once Mr. Read made that election, which he did prior to Ms. Read's transfer of her MMP stock to MMP, that transfer was required by the divorce judgment.
We hold that Q&A-9 applies to Ms. Read's February 5, 1986 transfer of MMP stock and that, pursuant to
To reflect the foregoing and the concessions of the parties in these cases,
An order recharacterizing Ms. Read's motion as a motion for partial summary judgment and granting it will be issued, and decision will be entered for petitioner in docket No. 19001-97.
An order denying Mr. Read's and MMP's motion will be issued.
Reviewed by the Court.
COHEN, CHABOT, PARR, WHALEN, COLVIN, FOLEY, VASQUEZ, and GALE, JJ., agree with this majority opinion.
* * * * * *
Colvin, J. concurring: I agree with the majority that
114 T.C. 14">*39 I. Thesis:
Nonsymmetrical Treatment of Spouses
The issue of whether, or how,
Application of these two principles will properly implement Congressional intent both for
The dissenting opinion of Judge Ruwe emphasizes the importance of achieving symmetrical results between spouses in the stock redemption context if
II.
Divorcing Spouses
No gain or loss is recognized on a transfer of property from an individual to a former spouse if the transfer is incident to divorce. See
The committee believes that, in general, it is
inappropriate to tax transfers between spouses. This policy is
already reflected in the Code rule that exempts marital gifts
from the gift tax, and reflects the fact that a husband and wife
are a single economic unit.
The current rules governing transfers of property between
spouses or former spouses incident to divorce have not worked
well and have 2000 U.S. Tax Ct. LEXIS 2">*64 led to much controversy and litigation. Often the
rules have proved a trap for the unwary as, for example, where
the parties view property acquired during 114 T.C. 14">*41 marriage (even though
held in one spouse's name) as jointly owned, only to find that
the equal division of the property upon divorce triggers
recognition of gain.
* * * * * * *
The committee believes that to correct these problems, and
make the tax laws as unintrusive as possible with respect to
relations between spouses, the tax laws governing transfers
between spouses and former spouses should be changed.
The Ways and Means Committee also said in its report:
This nonrecognition rule applies whether the transfer is for the
relinquishment of marital rights, for cash or other property,
for the assumption of liabilities in excess of basis, or for
other consideration and is intended to apply to any indebtedness
which is discharged. * * * Id. at 1492.
Thus, Congress made clear that it intended
III. Q&A-9 Extends
on Behalf of the Nontransferring Spouse Incident to Divorce
114 T.C. 14">*42 Q&A-9, as applied to divorcing spouses, properly implements
The language of
I disagree with the contention in Judge Ruwe's dissenting opinion at 65-66 that Q&A-9 applies to redemptions only if the redemption satisfies a primary and unconditional obligation of the spouse whose stock is not being redeemed. As stated by the majority, that requirement is not contained in or implied by the phrase "on behalf of". I also disagree with the contention in the dissenting opinion of Judges Laro and Marvel that Q&A-9 does not apply to corporate redemptions or that it applies only to transfers to a third party to satisfy an obligation owed by the nontransferring spouse to the third party. By their terms,
Furthermore, in divorce cases, the government often gets
whipsawed. The transferor will not report any gain on the
transfer, while the recipient spouse, when he or she sells, is
entitled under the Davis rule to compute his or her gain or loss
by reference to a basis equal to the fair market 2000 U.S. Tax Ct. LEXIS 2">*70 value of the
property at the time received.
* * * * * * *
Thus, uniform Federal income tax consequences will apply to
these transfers notwithstanding that the property may be subject
to differing state property laws.
As quoted supra note 4, the penultimate sentence of Q&A-9 implements the antiwhipsaw rule of
In the three situations described above, the transfer of
property will be treated as made directly to the nontransferring
spouse (or former spouse) and the nontransferring spouse will be
treated as immediately transferring the property to the third
party.
114 T.C. 14">*44 Thus, under
1. She is deemed to transfer her stock to Mr. Read.
2. Mr. Read is deemed to immediately transfer the stock to MMP.
Pursuant to the divorce judgment, Mr. Read elected for MMP to pay Ms. Read and to issue a promissory note to her. However, despite these actual facts, because (in my view)
Mr. Read and MMP indicated in their motion 2000 U.S. Tax Ct. LEXIS 2">*73 their belief that the primary and unconditional standard applies to
A payment to a shareholder in redemption of stock is a constructive dividend to the remaining stockholder if the non- redeeming stockholder had a primary and unconditional obligation to buy the stock. See, e.g., Arnes II;
The dissenting opinion of Judge Ruwe2000 U.S. Tax Ct. LEXIS 2">*74 advocates the primary and unconditional obligation requirement theory to avoid whipsaw. See Judge Ruwe's dissent pp. 59-64. Under that view, the remaining shareholder (here, Mr. Read) would be taxed only if the transfer of the redemption proceeds satisfied a primary and unconditional obligation of his to Ms. Read. Because under that analysis the remaining shareholder would often escape taxation, to achieve symmetry Judge Ruwe would permit the departing shareholder (here, Ms. Read) to exclude gain or loss under
If followed consistently in cases where
I concur because the analysis of the majority is fully consistent with the analysis in this concurring opinion.
PARR, WHALEN, FOLEY, VASQUEZ, and GALE, JJ., agree with this concurring opinion.
* * * * *
Ruwe, J., dissenting: I disagree with 2000 U.S. Tax Ct. LEXIS 2">*76 the standards that the majority opinion uses for determining whether Ms. Read's transfer of stock to MMP qualifies as a transfer to which
When considering whether
Long before the enactment of
The issue is whether the stock redemption resulted in a
constructive dividend to petitioner. We are faced with the rule
that where a corporation redeems stock which its remaining
shareholder was obligated to buy, the remaining shareholder
receives a constructive dividend. Wall v. United States, 164
F.2d 462 (4th Cir. 1947). However, the rule of Wall has been
limited to those circumstances where 2000 U.S. Tax Ct. LEXIS 2">*78 the obligation of the
purchasing shareholder is both primary and unconditional. Enoch
v.
redeems stock which the remaining shareholder was not obligated
to buy, no constructive dividend is received by that
shareholder.
Applying the above rules, certain disparate tax
consequences become apparent. When two shareholders own a
corporation, there is no practical economic difference between
using a stock redemption and using a dividend distribution to
the remaining shareholder to fund the acquisition of the selling
shareholder's stock. Nevertheless, the tax consequences to the
remaining shareholder are profoundly different. A knowledgeable
shareholder could negotiate a redemption by the corporation and
escape harsh tax consequences to himself; whereas, a less
knowledgeable shareholder 114 T.C. 14">*48 might unwilling commit himself to
effect the purchase and be threatened with an unintended
dividend. Except for the tax consequences, the shareholder's
economic positions are identical. Obviously, in this area 2000 U.S. Tax Ct. LEXIS 2">*79 of the
tax law, the form employed is critical and taxpayers are free to
choose the form most beneficial to themselves. It is against
this background that the rule of Wall has been limited to
circumstances where the obligation which has been discharged is
both primary and unconditional. [Fn. refs. omitted.]
If a redemption satisfied a primary and unconditional obligation of the remaining shareholder, the remaining shareholder was generally treated as having received a constructive dividend. See
The primary and unconditional standard is applicable to stock redemptions required by divorce judgments. For example in
Court opinions dealing with taxable years prior to the enactment of
Q&A-9 does not specifically address a spouse's transfer of stock to the issuing corporation as part of a corporate redemption that was required by a divorce judgment. However, in this case and prior cases, the Commissioner has consistently treated Q&A-9 as applying to divorce-related corporate redemptions, and this position has been adopted by the Court of Appeals for the Ninth Circuit in
One of the purposes for enacting
In part, Congress enacted
related transfer of property in exchange for the release of
marital claims resulted in recognition of gain to the
transferor. H. Rept. 98-432, at 1491-1492 (1984). Before the
enactment of
transferring former spouse was taxable on a divorce-related
transfer of appreciated property to his or her former spouse,
and the recipient received a basis in the transferred property
equal to its fair market value on the date of transfer. United
such a transferor did not report any gain on a transfer 2000 U.S. Tax Ct. LEXIS 2">*84 of
appreciated property. Accordingly, in 1984, Congress enacted
1492 (1984). [Fn. ref. omitted.]
Q&A-9 specifies the way a transaction will be treated for both spouses and requires symmetrical results as to those spouses in order to prevent a whipsaw. Under Q&A-9, if a spouse's transfer to a third party qualifies for nonrecognition under
Pursuant to Q&A-9, a transfer of property to 2000 U.S. Tax Ct. LEXIS 2">*85 a third party required by a divorce or separation instrument will be treated as qualified under
There is nothing in Q&A-9 to indicate that the Commissioner was attempting to, or could, change the existing standards for determining whether a corporate redemption of 114 T.C. 14">*51 one shareholder's stock could be treated as a distribution to the remaining shareholder. Indeed, Q&A-9 is a temporary regulation intended only to effect the legislative objective of
Respondent's position is that Mr. Read had a primary and unconditional obligation to purchase Ms. Read's stock and that the redemption of Ms. Read's stock (a necessary and integral part of which was her transfer of stock to MMP) satisfied Mr. Read's obligation. Mr. Read, MMP, and Ms. Read agree that the primary and unconditional obligation standard should be determinative of whether Ms. Read's transfer of stock was "on behalf of" Mr. Read within the 2000 U.S. Tax Ct. LEXIS 2">*88 meaning of 114 T.C. 14">*52 Q&A-9. On this point, the parties are all correct. 6 The primary and unconditional standard is still controlling law for determining whether a divorce-related redemption distribution to one shareholder spouse can ever be a dividend to the remaining shareholder spouse. See
Arnes II was decided for a tax year to which Q&A-9 was applicable. Indeed, the Court of Appeals for the Ninth Circuit had applied Q&A-9 to Mrs. Arnes giving her the nonrecognition benefit of
The majority now holds that the "on behalf of" requirement in Q&A-9 is satisfied by a standard that is 2000 U.S. Tax Ct. LEXIS 2">*90 substantially lower and less precise than the primary and unconditional obligation test of
One of the problems with simply applying the dictionary meaning of "on behalf of" to a divorce-related corporate 2000 U.S. Tax Ct. LEXIS 2">*91 redemption is that the redemption will usually, in a general sense, be in the interest of both the spouse whose stock is redeemed and the spouse who is the remaining shareholder. For example, the transferring spouse receives money from the corporation in return for her stock. This receipt of money (especially if it represents a substantial gain as in this case) benefits the transferring spouse. Oftentimes the transfer will also generally benefit the spouse who is the remaining shareholder. This is the same dilemma that courts confronted in trying to determine whether a redemption of one shareholder's stock could ever be considered a constructive dividend to the remaining shareholder. As a result, the courts fashioned the primary and unconditional obligation test that we applied in Arnes II. The fact that Ms. Read's transfer was simply "in the interest of" Mr. Read or that Mr. Read received "some general benefit" is an insufficient reason for us to conclude that Mr. Read could have a constructive dividend. See
Because Q&A-9 controls the tax treatment of both spouses, a divorce-related corporate redemption transaction should not be considered to be a transfer "on behalf of" the nontransferring 114 T.C. 14">*54 spouse within the meaning of Q&A-9 unless the nontransferring spouse had a primary and unconditional obligation to purchase the redeemed stock.
The majority's error is compounded by concluding that Mr. Read must recognize a constructive dividend but failing to give any legal explanation for this result. How could Mr. Read have a constructive dividend in light of our prior Court-reviewed opinion in Arnes II where we said that
The "indication" by Mr. Read and MMP is taken out of context. The full argument made by Mr. Read and MMP is that Q&A-9 cannot apply to a corporate redemption unless the redemption satisfies a primary and unconditional obligation of the nontransferring spouse. They "indicate" that if this standard is met and Q&A-9 applies, then respondent's determinations should be sustained. To take the latter statement out of context after having rejected the argument on which it is predicated is totally unwarranted. In any event, we should never rely upon and apply a party's statement of law that is contrary to a holding contained in a prior Court-reviewed opinion of this Court that is still binding precedent. 9 No matter how convenient it may be to avoid unreconcilable differences in our opinions, justice demands that we decide 2000 U.S. Tax Ct. LEXIS 2">*94 issues of law that control the outcome of cases that come before us. Today's majority opinion puts in place one legal standard for determining whether a transferring spouse receives the benefits of
The question we should ask and answer is whether MMP's redemption of Ms. Read's stock satisfied a primary and unconditional obligation of Mr. Read. If the answer is yes, we should hold that Q&A-9 applies, Mr. Read had a constructive dividend, and Ms. Read gets the benefit of
BEGHE, J., agrees with this dissent.
* * * * *
HALPERN, J., dissenting:
On February 5, 1986, Ms. Read disposed of all of her shares of stock in Mulberry Motor Parts, Inc. (the shares and MMP, respectively) by transferring the shares to MMP (the transfer). In consideration thereof, MMP paid Ms. Read $ 200,000 and agreed to pay her an additional $ 638,724 in installments (with interest). Ms. Read's adjusted basis in the shares was zero, and she realized a gain on the transfer. See sec. 1001(a). That gain must be recognized to her unless some nonrecognition provision applies. See sec. 1001(c). Ms. Read relies on
recognized on a transfer of property from an individual to (or
in trust for the benefit of) --
(1) a spouse, or
114 T.C. 14">*56 (2) a former spouse, but only if the transfer is incident
to the divorce. 1
Ms. Read is an individual, 2000 U.S. Tax Ct. LEXIS 2">*96 and she claims that no gain is recognized to her since she transferred the shares (property) to her former spouse (Mr. Read) incident to their divorce. Mr. Read disagrees that the transfer was to him. Ms. Read and Mr. Read agree that the question of whether the transfer was to him should be answered by determining whether he had a primary and unconditional obligation to purchase the shares. The majority holds that such an inquiry is inappropriate. I disagree. I further disagree with what seems to me to be the majority's evocation of the principles of
Mr. Read acquired virtually complete ownership of MMP without expending any of his own funds. He did so by arranging for MMP to redeem the shares. Such an acquisition, where the acquirer uses funds of the corporation to aid in his acquisition of control, is sometimes referred to as a "bootstrap acquisition". A part owner of a corporation can use the corporation's funds to acquire complete ownership of the corporation in one of two ways. One, he can arrange for the corporation 2000 U.S. Tax Ct. LEXIS 2">*97 to purchase the seller's shares. Two, he can purchase the seller's shares and cause the corporation to redeem those shares from him. There is no practical difference between those alternatives. In both cases, the seller receives the same amount, and the remaining owner (sometimes, the buyer) becomes the sole owner of the corporation, whose assets are reduced by the same amount. It is well settled, however, that the difference in form between those alternatives may result in different income tax consequences (at least for the buyer). As professors Bittker and Lokken put it:
If the buyer purchased all of the seller's stock and later
recouped some of the cash outlay by causing the corporation to
redeem part of the newly acquired stock, the redemption
distribution would be a dividend to the extent of earnings and
profits because, as a pro rata distribution, it could not meet
the standards of sections 302(b)(1), (2), or (3). The buyer,
however, 114 T.C. 14">*57 avoids dividend consequences where the redemption is
from the seller unless the buyer makes the mistake of
undertaking a personal obligation to purchase the shares before
the corporation agrees to redeem them.
3 Bittker & Lokken, 2000 U.S. Tax Ct. LEXIS 2">*98 Federal Taxation of Income, Estates, & Gifts, par. 93.1.5, at 93-17 (2d ed. 1991).
Although the form of the acquisition may be tailored to suit the buyer's tax status (a corporate buyer may prefer the dividend treatment that, given sufficient earnings and profits, generally would accompany the redemption of shares purchased from the seller), once it is tailored, the buyer is stuck with the chosen form. In an early leading case,
In a variation on Wall, in
Thus, if a buyer wishes to accomplish a bootstrap acquisition, the buyer, once having put the Wall type format into legally enforceable form, cannot avoid the tax consequences of a redemption from him of the seller's stock by having the corporation pay the seller directly. Nevertheless, if the corporation simply agrees to redeem the seller's stock and pays for the stock in installments, over time, and the payments do not discharge any obligation of the remaining owner, the payments do not constitute constructive distributions to the remaining owner. See
The logic of the bootstrap acquisition cases leads to the conclusion that, where the buyer has already purchased the seller's stock, as in
Buyer * * * is to have the right to assign this Agreement
to a corporation, 2000 U.S. Tax Ct. LEXIS 2">*103 thereby releasing Buyer therefrom, and
substituting such Corporation in the place of Buyer under this
Agreement, with the same force and effect as if this Agreement
were originally made with such Corporation, provided that such
Corporation shall, by writing, agree to be bound by all of the
terms, covenants and conditions of this Agreement. [
In Kobacker, we held that the taxpayer had assumed no personal obligation to purchase the stock under that contract. See
The fact that a bootstrap acquisition is incident to a divorce has no bearing on whether the buyer (for convenience, husband) and seller (wife) are held to the form upon which they have agreed. If the husband's obligation to purchase the wife's shares is primary and unconditional, then he is in constructive receipt of those shares notwithstanding that, on his behalf, the wife has transferred them to the corporation. If the husband does not have a primary and unconditional obligation to purchase the wife's shares, then he is not in constructive receipt of those shares, and the 114 T.C. 14">*60 wife's transfer of those shares to the corporation is not on his behalf. If, pursuant to
By agreement incorporated into the divorce judgment, Ms. Read was obligated to sell the shares to Mr. Read or, at his election, MMP or the ESOP Plan of MMP (the ESOP). Mr. Read, MMP or the ESOP, as the case would be, was obligated to purchase the shares. Payment for the shares was to be made in installments, with Ms. Read retaining a security interest in the shares. Mr. Read was to guarantee payment of the installments if he elected to have MMP or the ESOP make the payments. Subsequent to the divorce, Mr. Read elected to have MMP purchase 2000 U.S. Tax Ct. LEXIS 2">*105 the shares. Mr. Read, Ms. Read, and one other individual constituted the board of directors of MMP (the board). By unanimous written consent, the board consented to MMP's purchase of the shares. Subsequently, Ms. Read and MMP entered into a stock purchase agreement, and, pursuant thereto, MMP acquired the shares from her.
Since Mr. Read had the right to assign his obligation to purchase the shares, I do not believe that his obligation to purchase the shares was primary and unconditional. The facts here are similar to the facts in
The majority finds that the transfer did not satisfy any liability or obligation of Mr. Read's. Nevertheless, the majority finds that Ms. Read was, in effect, acting as Mr. Read's 114 T.C. 14">*61 agent in transferring the shares to MMP. Majority op. pp. 36-38. Without citing any authority, the majority appears to be relying on the principles of
In Court Holding Co., the Supreme Court said:
The incidence of taxation depends upon the substance of a
transaction. The tax consequences which arise from gains from a
sale of property are not finally to be determined solely by the
means employed to transfer legal title. Rather, the transaction
must be viewed as a whole, and each step, from the commencement
of negotiations to the consummation of the sale, is relevant. A
sale by one person cannot be transformed for tax purposes into a
sale by another by using the latter as a conduit through which
to pass title. To permit the true nature of a transaction to be
disguised by mere formalisms, which exist solely to alter tax
liabilities, would seriously impair the effective administration
of the tax policies of Congress. [
The majority appears to be applying Court Holding Co. principles to determine that, in substance, Ms. Read sold the shares to Mr. Read although, on his behalf, 2000 U.S. Tax Ct. LEXIS 2">*107 she transferred them to MMP. That is an inappropriate analysis in the bootstrap acquisition area, where there is no practical difference between the two ways of accomplishing the bootstrap acquisition and the only relevant distinction is form, which is manifest by legal rights and duties. See the discussion by professors Bittker and Lokken at 3 Bittker & Lokken, Federal Taxation of Income, Estates, & Gifts, par. 93.1.5, at 93-19 (2d ed. 1991).
IV. Conclusion
Since I believe that Ms. Read has failed to prove that the transfer was to Mr. Read, I would hold
WELLS and BEGHE, JJ., agree with this dissent.
114 T.C. 14">*62 BEGHE, J., dissenting: As a long-time continuing proponent of the view that the "on behalf of" standard of Q&A-9 applying
Two preliminary observations are in order.
First, it is not accurate to say, as does the majority opinion: "Respondent's role here is that of a stakeholder" 12000 U.S. Tax Ct. LEXIS 2">*110 (majority op. at 17). Mr. Read and MMP have much more at stake than Mrs. Read because the combined deficiencies of Mr. Read and MMP substantially exceed Mrs. Read's deficiencies:
Second, about the procedural settings on appeal: An appeal in Mrs. Read's case would go to the Court of Appeals for the Ninth Circuit; Mr. Read's appeal would go to the Court of Appeals for the Eleventh Circuit. Therefore, a whipsaw of respondent is not out of the picture, irrespective of how we decide the cases of Mr. Read and Mrs. Read.
It has been difficult to reach consensus about how to write up this case, much less decide it, because one or another of four different approaches might be used to determine the relationship of the "on behalf of" and "primary and unconditional obligation" standards. A summary and comment follow on each of the possible approaches.
(1) My continuing view is that the "primary and unconditional obligation" standard of traditional redemption tax 2000 U.S. Tax Ct. LEXIS 2">*113 law and the "on behalf of" standard of Q&A-9 should be construed and applied consistently; redemption tax law should govern the interpretation and application of the "on behalf of" standard. The correct application of this view in the case at hand would result in no taxable income to Mr. Read because he never had the primary and unconditional obligation 114 T.C. 14">*64 to purchase the stock; he was entitled under both the settlement agreement and the divorce decree to lay his purchase obligation off on MMP, which he did. See
The Reads' settlement agreement and divorce decree, which tied the amounts of Mr. Read's obligation to make periodic alimony payments to initial and continued compliance 2000 U.S. Tax Ct. LEXIS 2">*114 with the provisions for payment for Mrs. Read's stock, did not saddle Mr. Read with the primary and unconditional obligation to purchase and pay for Mrs. Read's stock. 6 The obligation to purchase and pay for her stock was assigned to and assumed by MMP as its primary and unconditional obligation.
(2) Judges Laro and Marvel believe that Q&A-9 just does not apply to redemptions. Adoption of this approach could cause both individual parties to a redemption of the stock of a divorcing spouse to incur tax liability if they are not well advised. In most cases the 2000 U.S. Tax Ct. LEXIS 2">*115 departing shareholder ex-spouse would recognize capital gain on the transaction that terminates his or her stock interest. Whether the remaining shareholder ex-spouse has a dividend would depend on whether he or she is considered as having the primary and unconditional obligation to purchase the departing shareholder's stock that was satisfied by the redemption.
If the remaining shareholder is considered to have had his primary and unconditional obligation to purchase the stock satisfied by the redemption, then under general principles of tax law the redemption should be recast as a purchase of the 114 T.C. 14">*65 stock by the remaining shareholder, followed by his contribution of the stock to the corporation in exchange for the cash that he constructively received and used to purchase the stock. This recast transaction results in a distribution of cash essentially equivalent to a dividend to him under sections 301 and 302(b)(1), and the departing shareholder ex-spouse should be entitled to nonrecognition of gain under
(3) In Judge Colvin's view, the "on behalf of" standard of Q&A-9 trumps traditional redemption tax law. I don't favor this view because it results in almost all cases under 2000 U.S. Tax Ct. LEXIS 2">*116 current law in a greater total tax liability to the private parties. Its adoption would mean that less will be available to pay off the departing shareholder ex- spouse. 7 However, Judge Colvin's view provides clear and consistent treatment of the ex-spouses and is preferable to the majority opinion. Adoption of Judge Colvin's view by a majority of the Court would provide clear guidance as to how we would resolve the treatment of both private parties in this type of consolidated case.
(4) Maybe the "on behalf of" and "primary and unconditional obligation" standards, in a hard-fought consolidated case with no improvident concession by either private party, can be so applied that both ex-spouses escape tax. 82000 U.S. Tax Ct. LEXIS 2">*117 Both traditional redemption tax law and
Some concluding thoughts: the parties' motions and memos in the case at hand leave the impression that Mr. Read's indication - - he loses if Mrs. Read wins -- was based on what the majority opinion now tells the parties was their mistaken belief about the applicable legal standard. If we are not going to adopt the view that the "on behalf of" and "primary and 114 T.C. 14">*66 unconditional obligation" standards are to be applied consistently, so that there 2000 U.S. Tax Ct. LEXIS 2">*118 need not be a winner and a loser as between the ex-spouses, then Mr. Read should not be bound by his "indication". My objective in making this suggestion, against the background of what we said and did in
Unfortunately, the majority opinion's rejection of a rule of equivalence perpetuates the uncertainty. What "every schoolboy knows," compare
I renew my pleas for guidance in the form of an interpretative 2000 U.S. Tax Ct. LEXIS 2">*119 regulation or a Congressional fix. See
* * * * *
LARO and MARVEL, JJ., dissenting: The majority holds today that
We summarize the critical facts of this case as follows. In connection with his divorce from Ms. Read, Mr. Read agreed to purchase Ms. Read's stock in MMP at a stated price, or, at his election, to cause MMP to redeem Ms. Read's stock. Mr. Read elected under the terms of their divorce judgment to 114 T.C. 14">*67 cause MMP to redeem the stock in his stead. MMP authorized the redemption and entered into a binding stock purchase agreement with Ms. Read. Pursuant to that agreement, in 1986, MMP redeemed Ms. Read's stock, paid Ms. Read $ 200,000 toward the redemption price, and issued Ms. Read 2000 U.S. Tax Ct. LEXIS 2">*120 a promissory note representing the balance of the redemption price. MMP paid Ms. Read $ 50,000 of the promissory note's principal during each year in issue.
The majority concludes that Ms. Read is not taxable on the subject gains resulting from her transfer of stock to MMP. The majority reasons that "Q&A 9 applies to Ms. Read's February 5, 1986, transfer of MMP stock and * * *, pursuant to
Congress enacted
114 T.C. 14">*68 The Commissioner issued temporary regulations under
Q-9. May transfers of property to third parties on behalf
of a spouse (or former spouse) qualify under
A-9. Yes. There are three situations in which a transfer of
property to a third party on behalf of a spouse (or former
spouse) will qualify under
requirements of the section are satisfied. The first situation
is where the transfer to the third party is required by a
divorce or separation instrument. The second situation is where
the transfer to the third party is pursuant to the written
request of the other spouse (or former spouse). The third
situation is where the transferor receives from the other spouse
(or former spouse) a written consent or ratification of the
transfer to the third party. Such consent or ratification must
state that the parties intend the transfer to be treated as a
transfer to the nontransferring 2000 U.S. Tax Ct. LEXIS 2">*123 spouse (or former spouse)
subject to the rules of
transferor prior to the date of filing of the transferor's first
return of tax for the taxable year in which the transfer was
made. In the three situations described above, the transfer of
property will be treated as made directly to the nontransferring
spouse (or former spouse) and the nontransferring spouse will be
treated as immediately transferring the property to the third
party. The deemed transfer from the nontransferring spouse (or
former spouse) to the third party is not a transaction that
qualifies for nonrecognition of gain under
Nowhere in Q&A-9, or, for that matter, in any of the other Q&A's, do we read that a gain arising from a spouse's sale of assets to a third party qualifies for nonrecognition treatment under
As we understand the breadth of Q&A-9, with a fair reading of our reviewed opinion in
While it is true that Q&A-9 recognizes that some transfers of property by a spouse to a third party may qualify for nonrecognition treatment under
The critical fact is that Mr. Read had no obligation to MMP that was satisfied by Ms. Read's transfer of her stock to MMP. Thus, although Ms. Read may have transferred her stock to MMP at the direction of Mr. Read, we do not believe 2000 U.S. Tax Ct. LEXIS 2">*126 that she did so "on behalf of" him. In Blatt, we held that the redemption of Ms. Blatt's stock pursuant to a divorce decree was not on behalf of Mr. Blatt because Ms. Blatt failed to prove the 114 T.C. 14">*70 redemption satisfied an obligation of his. See
The only reported opinion in which this Court has decided whether a corporate redemption incident to a divorce qualified for nonrecognition treatment under
We conclude with a final concern about the analysis set forth in the majority Opinion. Congress enacted
But for his "concession", the majority would have had to analyze the tax effect of the redemption on Mr. Read. Q&A-9 states that the nontransferring spouse is taxed on the third party transfer; it does not specify when this tax arises. If, in fact,
114 T.C. 14">*72 THORNTON, J., agrees with this dissent.
2. Ms. Read incorrectly characterized her motion as a motion for summary judgment. However, in addition to the determination in the notice of deficiency (notice) issued to Ms. Read that we address in this Opinion, respondent made two other determinations in that notice, one of which respondent conceded and the other of which is computational. Consequently, we have recharacterized Ms. Read's motion as a motion for partial summary judgment.
3. All Rule references are to the Tax Court Rules of Practice and Procedure. All section references are to the Internal Revenue Code in effect for the years at issue.↩
4. Under Florida law, any action which is required to be, or may be, taken at a meeting of the directors of a corporation may be taken without a meeting of such directors provided that a consent in writing setting forth the action to be taken is signed by all of the directors and is filed in the minutes of the proceedings of the board of directors. Any such action by unanimous written consent of each director has the same effect as a unanimous vote of the board of directors. See
5. The notice issued to Ms. Read did not relate to Ms. Read's taxable year 1988.↩
6. The parties stipulated that Ms. Read's basis in the MMP stock that she owned was zero.↩
7. Mr. Read and MMP indicated in their motion that if the Court were to hold that
8. For convenience, we shall refer only to a spouse, and not to a former spouse.↩
9. We had consolidated the cases of Ms. Hayes and Mr. Hayes for trial, briefing, and opinion.
10. Any suggestion in
11. Ms. Arnes was the taxpayer before the U.S. Court of Appeals for the Ninth Circuit in
12. We stated in footnote 3 referred to in the foregoing excerpt from
This majority opinion does not express an opinion as to
whether the standard of "on behalf of" the spouse in sec.
1.1041-1T(c), Q&A-9, Temporary Income Tax Regs. * * * is
the same as the primary and unconditional obligation rule
applicable to a constructive dividend. Suffice it to say that
our conclusion in this case [
consistent with our conclusion in Blatt v. Commissioner, 102
T.C. 77 (1994), also a Court-reviewed opinion.↩
13. Unlike the divorce judgment involved in the instant cases, the divorce decree in
14. The issue in
In
The focus of the court's analysis in Arnes [v. United States,
supra] was not whether the plaintiff's [transferring spouse's]
former husband had received some general benefit as a result of
the plaintiff's transaction, but rather whether the transaction
had satisfied some legal obligation or liability owed by her
former husband. * * *
The Court of Appeals held in
15. We stated in
we disagree with Arnes; any putative benefit to Blatt, such as
relief from a possible claim under marital property distribution
laws, does not mean that the transfer by petitioner of her
shares to [Phyllograph] corporation was on behalf of Blatt. We
note, however, that the facts in Arnes are easily
distinguishable from the facts at hand. * * *↩
16. Nor did we indicate in
17. Instead, we gave the following illustration:
To illustrate the operation of Q&A 9, assume that H owes a debt
to a bank, and W, as part of a divorce settlement, transfers her
unencumbered appreciated stock to the bank in discharge of H's
debt. This transfer falls within the first "situation" described
in Q&A 9; that is, the transfer is required by a divorce
instrument and is made by W on behalf of H. * * * [Blatt
v.
18. Nor did we conclude in
The Court of Appeals for the Ninth Circuit in
19. Consequently, we need not resolve the parties' dispute over whether the primary-and-unconditional-obligation standard is satisfied as to Mr. Read.↩
20. Our holdings that the primary-and-unconditional- obligation standard is not an appropriate standard to apply under Q&A-9 in the instant cases, or in any case involving a corporate redemption in a divorce setting, do not disturb constructive-dividend decisional law. That law applies the primary-and-unconditional- obligation standard in order to determine in the case of a corporate redemption the tax consequences to a stockholder whose stock is not being redeemed and who is analogous to the nontransferring spouse under Q&A-9 and
21. The inquiry under constructive-dividend decisional law as to whether a transfer of redemption proceeds by the redeeming corporation to the redeeming stockholder satisfies a primary and unconditional obligation of another stockholder is intended to determine whether such a transfer, in substance, is (1) a payment by the redeeming corporation of a dividend to the stockholder whose stock is not being redeemed in an amount equal to such redemption proceeds and (2) an immediate transfer of that same amount by such stockholder to the stockholder whose stock is being redeemed in payment for such stock.↩
22. The inquiry under Q&A-9 as to whether a transfer of property by the transferring spouse to a third party is made on behalf of the nontransferring spouse is intended to determine whether such a transfer, in substance, is (1) a transfer by the transferring spouse of property to the nontransferring spouse and (2) an immediate transfer of that property by the nontransferring spouse to the third party.↩
23. It has been suggested that the primary-and-unconditional- obligation standard should be adopted as the only standard for determining whether the on-behalf-of standard in Q&A-9 is satisfied in the case of a corporate redemption in a divorce setting because the primary-and-unconditional-obligation standard has served well in distinguishing between the form and substance of corporate redemptions occurring in commercial settings. If that suggestion is intended to mean that adoption of the primary-and- unconditional- obligation standard by the courts has eliminated, or substantially minimized, litigation over whether a stockholder whose stock is not being redeemed receives a constructive dividend as a result of the redemption of the stock of another stockholder, we disagree with that suggestion. The determination of whether the primary-and- unconditional-obligation standard has been satisfied is a fact- intensive inquiry, which has engendered much litigation in which the parties have disputed whether that standard is met as to the stockholder whose stock is not being redeemed. Indeed, in the instant cases, the parties disagree over whether that standard is met as to Mr. Read.
24. In support of their position that Ms. Read's transfer of her MMP stock to MMP does not satisfy the on-behalf-of standard in Q&A-9, Mr. Read and MMP contend, inter alia, that "Mr. Read would not be obligated [under the divorce judgment] to purchase Ms. Read's [MMP] stock unless he affirmatively elected to purchase the stock". We find that contention of Mr. Read and MMP to be contrary to the plain language of the divorce judgment and a strained and unreasonable construction thereof. The divorce judgment obligated Ms. Read to transfer to Mr. Read, and Mr. Read to purchase from Ms. Read, her MMP stock. No condition had to be satisfied under that judgment in order for those obligations to exist. The divorce judgment did permit Mr. Read to elect to have Ms. Read transfer her MMP stock to MMP or to MMP's ESOP, instead of to him, and to have MMP or MMP's ESOP, instead of him, purchase that stock from her. Mr. Read decided to, and did, make that election.
25. During the trial in the marriage dissolution action that Ms. Read instituted against Mr. Read, Ms. Read and Mr. Read reached an oral agreement referred to herein as the marital settlement agreement. The Florida court ratified and approved that agreement in the divorce judgment and ordered Ms. Read and Mr. Read to comply with the terms of that agreement. The marital settlement agreement provided in pertinent part:
Wife [Ms. Read] agrees to convey to husband [Mr. Read] all of
her stock in Mulberry Motor Parts, both voting and non-voting.
And for such stock, husband, or at his option, Mulberry Motor
Parts or the Aesop [sic] plan of Mulberry Motor Parts agrees to
purchase such stock at its appraised value * * *.
Thus, the marital settlement agreement required (1) Ms. Read to transfer her MMP stock to Mr. Read and (2) Mr. Read to pay Ms. Read a specified amount of consideration for that stock. That agreement also gave Mr. Read, and only Mr. Read, the option of deciding that MMP or MMP's ESOP, instead of him, pay that consideration to Ms. Read.↩
26. It has been suggested that Ms. Read's transfer of her MMP stock to MMP was in the interest of Ms. Read, and not in the interest of Mr. Read, in that Ms. Read wanted or preferred to have MMP, rather than Mr. Read, purchase her stock because in that event she would have received from MMP cash and MMP's note that was guaranteed by Mr. Read, rather than merely cash and a note from Mr. Read. Such a suggestion assumes that the financial condition of MMP was better than the financial condition of Mr. Read at the time of Ms. Read's February 5, 1986 transfer of MMP stock and that Ms. Read wanted or preferred to have MMP, rather than Mr. Read, purchase her MMP stock. The record does not support either of those assumptions. In fact, we infer from the record that Mr. Read's financial condition at the time of Ms. Read's February 5, 1986 transfer of MMP stock was better than the financial condition of MMP. That is because under the divorce judgment the note that Mr. Read was obligated to transfer to Ms. Read (along with a stated amount of cash) in order to pay her for her MMP stock was not required to be guaranteed by MMP. We also infer from the record that Ms. Read did not want or prefer that MMP, instead of Mr. Read, purchase her MMP stock. If Ms. Read wanted or preferred to have MMP, rather than Mr. Read, purchase her MMP stock, we believe that Ms. Read would have negotiated a property settlement that would have been reflected in the divorce judgment under which (1) Ms. Read would have been required to sell her MMP stock to MMP and MMP would have been required to give her cash and a note that was guaranteed by Mr. Read or (2) Ms. Read would have been required to sell her MMP stock to Mr. Read and MMP would have been required to guarantee the note that Mr. Read issued to Ms. Read (along with cash) in order to pay her for her MMP stock. At a minimum, if Ms. Read wanted or preferred to sell her MMP stock to MMP, instead of to Mr. Read, Ms. Read would have negotiated a property settlement that would have been reflected in the divorce judgment under which Ms. Read, and not Mr. Read, would have been given the option of requiring (1) that she sell her MMP stock to MMP and (2) that MMP, and not Mr. Read, give her cash and a note that was guaranteed by Mr. Read. The record in the instant cases is clear: The only reason Ms. Read transferred her MMP stock to MMP was because Mr. Read wanted, and directed, her to do so by electing that she transfer that stock to MMP.
Even assuming arguendo that Ms. Read's transfer of her MMP stock to MMP was in the interest of Ms. Read, and not in the interest of Mr. Read, a suggestion that is not supported and is in fact rejected by the record in the instant cases, Ms. Read was nonetheless acting as Mr. Read's representative -- another common, ordinary meaning of the phrase "on behalf of" -- in making that transfer to MMP. That is because she was following and implementing Mr. Read's direction as reflected in his election under the divorce judgment that she transfer her MMP stock to MMP, which stock, absent Mr. Read's direction, Ms. Read was obligated to transfer to Mr. Read.
27. We have considered all of the contentions and arguments of Mr. Read and MMP that are not discussed herein and find them to be without merit and/or irrelevant to our resolution of whether Q&A-9 and
1. Compare, e.g.,
2.
DIVORCE.
(a) General Rule. -- No gain or loss shall be recognized on
a transfer of property from an individual to (or in trust for
the benefit of) --
(1) a spouse, or
(2) a former spouse, but only if the transfer is
incident to the divorce.
* * * * * * *
(c) Incident to Divorce. -- For purposes of subsection
(a)(2), a transfer of property is incident to the divorce if
such transfer --
(1) occurs within 1 year after the date on which the
marriage ceases, or
(2) is related to the cessation of the marriage.↩
3.
4.
Q-9. May transfers of property to third parties on
behalf of a spouse (or former spouse) qualify under section
1041?
A-9. Yes. There are three situations in which a
transfer of property to a third party on behalf of a spouse
(or former spouse) will qualify under
provided all other requirements of the section are
satisfied. The first situation is where the transfer to the
third party is required by a divorce or separation
instrument. The second situation is where the transfer to
the third party is pursuant to the written request of the
other spouse (or former spouse). The third situation is
where the transferor receives from the other spouse (or
former spouse) a written consent or ratification of the
transfer to the third party. * * * In the three situations
described above, the transfer of property will be treated
as made directly to the nontransferring spouse (or former
spouse) and the nontransferring spouse will be treated as
immediately transferring the property to the third party.
The deemed transfer from the nontransferring spouse (or
former spouse) to the third party is not a transaction that
qualifies for nonrecognition of gain under
5.
Transferor's Basis. -- In the case of any transfer of property
described in subsection (a) --
(1) for purposes of this subtitle, the property shall
be treated as acquired by the transferee by gift, and
(2) the basis of the transferee in the property shall
be the adjusted basis of the transferor.↩
6. See
7. If
8. MMP had earnings and profits well in excess of the redemption payments during the years in issue.↩
1. The constructive "treatment" of the participants in a redemption that satisfied the primary and unconditional obligation of the remaining shareholder under pre-
We note that the installment method of sec. 453 does not apply to the receipt of a distribution taxed as a dividend under sec. 301. The installment method may be used only to report "income" from a "disposition of property", sec. 453(a) and (b)(1), and a "distribution of property" under sec. 302(d) does not meet that requirement, see
3. It has been suggested that Q&A-9 can never apply to a corporate redemption. If this were true, a corporate redemption of one spouse's stock that satisfied the other spouse's primary and unconditional obligation to purchase that stock could result in both spouses being taxed on the redemption. Such a result is contrary to the objective of
4. It has been suggested that Arnes II did not discuss the impact that
Cf., e.g.,
6. Ms. Read and respondent argue that the redemption satisfied Mr. Read's primary and unconditional obligation, while Mr. Read and MMP argue that Mr. Read was never primarily and unconditionally obligated to purchase Ms. Read's stock.↩
7. The Court of Appeals for the Ninth Circuit concluded that the obligation to purchase Mrs. Arnes' stock was Mr. Arnes' obligation, not the corporation's. Thus, the Court of Appeals' opinion is consistent with the primary and unconditional obligation standard.↩
8. It has also been suggested that
9. The majority does not purport to overrule or modify Arnes II.↩
1. The term "incident to the divorce" is defined in
1. Defined by Black's Law Dictionary 1412 (7th ed. 1999) as: "A disinterested third party who holds money or property, the right to which is disputed between two or more parties." (Emphasis supplied.)
Hewing to the bright line rules of
in the marital dissolution context will reduce the tax costs of
divorce for the owners of small businesses held and operated in
corporate form. If the shareholder spouses can negotiate their
separation agreement with the assurance that the redemption will
be tax free to the remaining shareholder and a capital gain
transaction to the terminating shareholder, the overall tax
costs will ordinarily be less than if the terminating spouse
qualifies for nonrecognition under
remaining spouse suffers a dividend tax. This will leave a
bigger pie to be divided in setting the consideration for the
shares to be redeemed. [Fn. ref. omitted.]
Although for the years in issue in the cases at hand, long-term capital gain and ordinary income were subject to tax at the same rates, the writer's observation in Arnes applies to more recent and current taxable years, in which long-term capital gains are subject to tax at lower rates than ordinary income.
Even in cases in which there are other remaining shareholders of the distributing corporation, treating the corporation's payment to the departing shareholder ex-spouse as a distribution in redemption of the purchased stock to the remaining shareholder ex-spouse will cause the constructive distribution to be treated as a dividend to the remaining shareholder ex-spouse under sec. 301 rather than as a substantially disproportionate redemption under sec. 302(b)(2) qualifying as a distribution in payment in exchange for the stock under sec. 302(a), with resulting capital gain treatment. This is because the proportionate interest in the corporation of the remaining shareholder ex-spouse will always be increased as a result of the reduction in the number of outstanding shares that occurs by reason of the redemption.↩
3. Mr. Read has not put in issue respondent's determination that he is liable to dividend treatment on the subsequent years' payments of interest and principal on the note for years following the year the note was issued. Conceivably, the correct approach would have been for respondent to treat the fair market value of the note as a dividend distribution to him in the year of issuance, see
4. It is understood that Mr. Read has not raised the point -- and it is not in issue in the cross-motions for partial summary judgment before the Court -- that if the corporate payments are to be included in his gross income as constructive dividends, then he is entitled to deduct the interest portion of the payments as business interest. There is no occasion here to comment on this point, other than to observe that, under the analysis of the concurring opinion, the obligation to pay interest to Mrs. Read would be the deemed obligation of Mr. Read, rather than that of the corporation. Cf.
6. Even if the standard espoused by Judges Ruwe and Halpern↩ and the writer should be adopted, a Judge adopting that standard might conclude that Mr. Read did not divest himself of the primary and unconditional obligation to purchase Mrs. Read's stock. The ground of that conclusion, with which the writer would disagree, is that the integration of and reciprocal relationship between Mr. Read's alimony obligations and MMP's continuing obligation to complete the scheduled payments in satisfaction of the obligation to purchase Mrs. Read's stock left Mr. Read with the primary and unconditional continuing obligation to purchase her stock.
7. See supra note 2.↩
8. There's another way (a far-out fifth possibility) the Court could hold that both parties escape tax, which the Court has properly rejected. There is a view (disagreed with in the writer's
1. We use the term "spouse" to include both a spouse and a former spouse.↩