N O T FO R PUB L ICAT IO N UNITED STATES C OUR T OF APPEALS FOR THE NINTH C IR C U IT J. M IC HAEL B ELL; SANDR A L. B ELL, Pe t i tione rs-Appe lla

nts,
v. C OM M ISSIONER

OF INTER

NAL R EVENUE, R e sponde nt-Appe lle e . No. 16-70165 Ta x C t. No. 11917-12
M EM O R ANDUM *

M B A REAL ESTATE, INC
. ,

Pe t i tione r-Appe lla

nt,
v. C OM M ISSIONER

OF INTER

NAL R EVENUE, R e sponde nt-Appe lle e . No. 16-70166 Ta x C t. No. 11918-12

Appe a l from

De c isions of the Unite d Stat e s Tax C ourt 

# F IL ED
JUL 12 2017 M OLLY C. DW Y E R, CLERK U. S. CO URT O F APPEALS

* This disposition is not a

ppropria te for public a tion a

nd is not pre c e de nt e xc e pt a s provide d

by Ninth C irc uit R

ule 36-3.Subm itte d July 10, 2017 ** San Fran c isc o , C a lifornia B e fore : GR

AB E R and FR IEDLAND, C irc uit Judge s, a nd GUILFOR

D, * ** Distric t Judge
. Pe titione rs J. M ic ha e l B e ll, Sa ndra B e ll, a nd M B A R e a l Esta

te , Inc
. (" M B A" ), a

ppe a l the tax c o urt’ s de c isions a sse ssing de fic ie nc i e s in inc om e tax due for ta xa ble y e ars 2008, 2009, a

nd 2010. W e a ffirm
. In 2008, ne wly

form e d M B A purc ha se d a ll a sse ts— prim arily re a l-e sta te
owne d (" R EO" ) c ontra c ts— from M r. B e ll’ s sole proprie torship for $225,000, to be pa id in m onthly

insta l lm e n t s of $10,000, a t 10% inte re st. The tax c o urt he ld tha t the t a x tre a tm e nt of tha

t tra nsa c tion wa s gove rne d by 26 U.S.C . § 351(a ), whic h
a pplie s whe n " p rope rty

is tra n s fe rre d to a

c orporation by

one or m ore pe rsons sole ly in e xc ha nge for stoc k in suc h c orporation." Pe titione rs a sse rt tha t the c ourt
e rre d be c a

use the B e l ls re c e ive d a c ontra c tua l right to $225,000, not " stoc k." Pe titione rs the re fore urge us to hold tha t the tra nsa c tion is governe d by

§ 351(b), whic h a pplie s whe n a

pe rson re c e ive s " othe r prope rty or m one y ."

* * T he pa ne l una nim ously c onc lude s tha

t this c a se is suita

ble for de c ision without ora l a

rgum e nt. Fe d. R . App. P. 34(a )(2).

* * * The Honora

ble Andre w J. Guilford, Unite d State s Distric t Judge for the C e ntra l Distric t of C a lifornia , sitting by de signa tion. 2Title 26 U.S.C
. § 385 de fine s the " [t] re a tm e nt of c e rta in inte re sts in

c orporations a s stoc k or inde bte dne ss." Although a c orporation m ay

c ha ra c te riz e a transa c tion a s c re ating indebte d ne ss, tha t c ha ra c te riz a tion is not binding on the Se c re t ary . Id. § 385(c )(1). Apply i ng re le va nt fa c tors—

t o be prom

ulga te d via
re gula tion— the Se c re ta

ry of the Tre a sury

m ust de te rm ine " whe the r a

n inte re st in a
c orporation is to be

tre a te d for purpose s of this title a s stoc k or inde b te dne ss (or a s in pa rt stoc k a n d in pa rt inde bte dne ss)." Id. § 385(a ). In othe r words, § 385 dic t a te s whe the r Pe titione rs’ inte re st in thec o rporation— the c ontra c tua l right to
c olle c t $225,000—

is " stoc k" for purpose s of title26. In Ha rdm an v. Unite d State s, 827 F.2d 1409, 1411 n.1 (9th C ir. 1987), we note d tha t the Se c re t ary

ha d y e t to prom

ulga te a re gula tion listing the

a pplic a ble fa c t ors. W e the re fore announc e d our own 11-fa c tor te s t, sy nthe s iz e d from

e arlie r
c ourt de c isions. Id. a

t 1411–12. W e a gre e with the pa rtie s tha t those fa c tors de te rm i ne the prope r c ha

ra c te riz a tion of thetra

nsa c tion a t issue he re . 1 Having c are fully

c onside re d the 11 fa c tors, we hold tha t the tax c ourt did not
c le arly e rr in c onc luding tha

t the c ontra c tua l right to $225,000 wa s prope rly

1 The Se c re ta

ry re c e ntly prom

ulga t e d a re gula

tion on point, but the re gula tion doe s not a

pply he re : " This se c tion a

pplie s to ta

xa ble y e ars e n ding on or a fte r Ja nua ry 19, 2017." 26 C .F.R . § 1.385-1(f). In a ny e ve nt, the ne w re gula

tion doe s not c ha

n ge the ana ly sis be c a

use , going forwa

rd, the prope r tre a tm e nt of a transa c tion " is de te rm ine d ba s e d on c om m on la w, inc luding thefa c tors pre sc ribe d unde r suc h c om

m o n la w." Id. § 1.385-1(b).

3vie w e d a s " stoc k" and not " inde bte dne ss." The tra nsa c t ion ha d m any

form a l indic ia of a true sa le , thus supporting a finding of inde bte dne ss. B ut " [s] ubsta

nc e , not form , c ontrols thec ha ra c te riz a tion of a

taxa ble tra nsa c tion," Ha

rdm an, 827 F.2d at 1411, a

nd m any fa c tors support the

tax c ourt’ s de t e rm i nation tha t the right to $225,000 wa s prope rly vie we d a s " stoc k." M B A ha d no m e aningful a sse ts a

pa rt from the R EO c ontra c ts a

n d no history of doing busine ss. The re wa s no se c urity ; the re wa s no prom issory

note ; M B A ha d ve ry

littlec a pita l; M B A ha d

no history of
re pa ym e nt; a nd M B A’ s sole non-trivia l a sse ts— the R EO c ontra c ts—

we re spe c ulative . As the tax c ourt c orre c tly found, " [t] he re is no e vide nc e in the re c ord
a s to whe the r M B A would ha ve be e n a ble to obta in a

loa n from a third pa rty . M B A wa s a

ne wly orga niz e d, thinly

c a pita l iz e d busine ss." The tra nsa c tion a t issue he re diffe rs in se ve ra l im porta nt wa y s from the transa c tion we a d d

re s se d in Gy

ro Engine e ring C orp. v. Unite d State s, 417 F.2d 437 (9th C ir. 1969). First, in Gy ro, the c orporation issue d " a se rie s of ne gotia

ble prom issory

note s," id. a

t 438, whe re a s he re no suc h note s we re issue d. Se c ond, the purc ha se d a

pa rtm e nts in Gy

ro ha d a history of produc ing inc om e , a

n d tha t inc om e
wa s suffic ie nt to m ake a ll the ne c e ssa ry pa ym e nts unde r the note s. Id. a t 439. He re , the re wa s no m e aningful history of pa ym e nts unde r the REO c ontra c ts a nd the c ontra c ts we re spe c ulative in na ture . Third, unlike the R EO c o ntra c ts a t issue

4he re , the a

pa rtm e nt buildings in Gy

ro ha d " se l f liquida

ting pote n tia l ." Id. Fourth, unlike the unknown a

nd spe c ulative c a sh va lue of the RE O c o ntra c ts, the pa rtie s in Gyro ha d e xpe rts te stify a s to the " p re se nt c a sh va lue " of the a pa rtm e nt buildings,
and tha t va lue wa s a

pproxim a te ly

the sa m e a s the tra

nsa c tion a m ount. Id. a

t 440 n.5. Fina lly , unlike the la c k of e vide nc e in this re c ord sugge sting tha t a le nde r would e nte r into a

c om pa ra ble a gre e m e nt, the gove rnm e nt’ s e xpe rt in Gy ro

" a c knowle d ge d t

hat ‘ the hy

p o the tic a l a

ve ra g e inve stor’ would ha ve e nte re d into the a gre e m e nt." Id. at

439–40. For those re a sons, we hold tha t, unde r 26 U.S.C . § 385, the ta x c ourt prope rly tre a te d the c ontra c tua l right to $225,000 a s " stoc k" for purpose s of title 26. B e c a use the B e lls re c e ive d only " stoc k," § 351(a ), a

nd not § 351(b), gove

rns the t a x tre a tm e nt of the tra nsa c tion. 2 AFFIRM E D.

2 In urging us to hold tha

t § 351(b) doe s not a

p p ly , the gove rnm e nt a dva nc e s an outda t e d— a nd e rrone ous— a

rgum e nt tha

t the c ontra c tua l right is a

" se c urity " and the re fore not pa

rt of the " boot." Se e Gov’ t’ s B rie f a t 40–42 (c iting c a se s from 1933, 1940, 1954, 1958, a nd 1978). Thepre -1989 ve rsion of § 351 distinguishe d be twe e n " stoc k or se c uritie s" on the one ha nd a nd " othe r prope rty or m one y " on the o the r hand. E.g., 26 U.S.C . § 351 (1988) (e m p ha sis a dde d). B ut in 1989, C ongre ss re m ove d the " or se c uritie s" c la use from § 351 in a

se c t ion of the Public Law title d

" Se c uritie s Tre ate d a s B oot Unde r Se c t ion 351." Pub. L. No. 101-239, § 7203, 103 Sta

t. 2106, 2333 (1989). The gove rnm e nt’ s sta l e argum e nt doe s not a ffe c t our a

na ly sis be c a

use , unde r § 385, thec ontra c tua l right to pa ym e nt is prope rly vie we d a s " stoc k." 5