T.C. Mem o. 2 01 5- 11 1

UNITED STAT ES TAX COURT

J. M ICHAEL BELL AND SANDRA L. BELL , Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt MBA REAL ESTATE, INC., Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 1 19 17 -1 2, 1 19 18 -1 2. Fi le d J un e 1 5, 2 01 5.

Perry D. Pop ov ic h, fo r pe ti ti on ers . Ch on g S . Hon g, fo r res po nd en t.

MEMORANDUM OPINION HAINES, Ju dg e: Thes e cas es be fo re the Co urt ar e co ns ol id at edfor pu rp os es of t ria l, b rie fin g, an d o pi ni on . J. Mi ch ael Bel l an d S an dr a L. Bel l (B el ls ) an d M BA Rea l Es ta te , Inc . (MBA), s ep arat el y pe ti ti on edth e Co urt fo r red et erm in at io n o f th e fo ll owi ng de fic ie nc ie s i n F ed eral in co m e ta x:-2
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[* 2] Peti ti on er Year Defic ie nc y J. M ic ha el Bel l an d S an dr a L. Bel l, 20 08 $4 ,68 2 do ck etNo. 1 19 17 -1 2 20 09 13 ,28 1 20 10 6,8 13 MBA Re al Est at e, In c., 20 08 $15 ,46 8 do ck etNo. 1 19 18 -1 2 20 09 45 ,01 3 20 10 6,7 20 Herei na fte r, 20 08 , 20 09 , and20 10 wil l b e ref erre d t o a s the y ears at i ss ue . After co nc es si on s, the is su es forde ci si on are: (1) whethe r th e is su an ce o f th e n ot ic es of de fic ie nc y

for20 08 is barredby the ex pi rat io n o f th e li m it at io ns pe rio d fo r as se ss m en t p ur su an t t o s ect io n 6 50 1 an d (2 ) whe th er the Bel ls ’ tra ns fer o f as se ts 1 to MBA was a sa le or acap it al co nt rib ut io n. Bac kg ro un d The se cas es were s ub m it te d t o the Co urt fu ll y st ip ul at edpu rs uantto Ru le 12 2. Th e p art ie s’ st ip ul at io ns of f act s, wi th att ach edex hi bi ts , are i nc or po rat ed he rei n b y th is refe ren ce. Whenth e p et it io ns were fi le d, the Bel ls li ve d i n Cal ifo rn iaan d M BA’s pr in ci pa l p la ce o f bu si ne ss was i n S an taCla ra, Cal ifo rn ia . Dur in g the y ears at i ss ue th e num be r of de fau lt s o n l oa ns sec ur edby res id en ti al real est at e in Cal ifo rn iain crea se d dram at ic al ly becau se of t he Great Unl es s o th erwi se in di cat ed , all sec ti on refe ren ces are t o the Int ern al 1 Rev enue Co de , as a m en de d a ndineffec t fo r th e y ears at i ss ue , andall Ru le refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d P ro cedur e.-3
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[* 3] Rec es si on . Duri ng th is ti m e a p ro pe rty’ s fa ir m ark etva lu e was oft enles s tha n th e am ou ntowedto th e le nd er. As a r es ul t, l en de rs acqui redat f or ecl os ur e sa le s m an y of the res id en ti al pro pe rti es sec ur in g the ir l oa ns an d att em pt edto res el l the pr op ert ie s athi gh er p ric es . Thes e types of p ro pe rti es are kno wn as “ real est at e own edpro pe rti es ” (REO). So m e le nd ers servi cedth ei r own REO po rtf ol io s wh il e ot he rs rel ie d o n thi rdpa rti es for th es e se rv ic es . Dur in g the y ears at i ss ue Mr. Bel l was a li cen se d re al est at e b ro ke r an d M rs . Bel l was a cert ifi edreal est at e ap pr ai se r an d ali cen se d re al est at e sa le s ag en t. By 20 07 Mr. Bel l h adco m

pl et edtra in in g a ndha d o bt ai ne d the ne ces sa ry cert ifi cat io ns to joi n n etworks of b ro ke rs who ass is te d l en de rs with the ir R EO po rtf ol io s. Th e as si st an ce co ns is te d, am on g o th er thi ng s, o f pr ov id in g a n e st im at e of th e v al ue of t he res id en ti al real est at e se cu rin g the lo anbe fo re a fo recl os ur e sa le . If th e le nd er ac qu ire d the real est at e atth e fo recl os ur e sa le an d the pro pe rty was oc cupi ed , th e b ro ke r as si st edinrep os se ss in g the pro pe rty for the len de r an d ov ers eei ng th e cl ean in g, re pa ir, andm ai nt en an ce o f th e p ro pe rty in ant ic ip at io n o f a subs eque ntsal e. The l en de r th ensi gn eda li st in g a gr eem en t wi th th e b ro ke r au th or iz in g the lat te r to sel l the pro pe rty. O th er tha n n om in al co ns id erat io n fo r th e pr efo recl os ur e es ti m at e o f va lu e an d re im bu rs em en t fo r an y

ex pe ns es rel at edto th e-4
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[* 4] cle an in g, m ai nt en an ce, an d re pa ir o f th e p ro pe rty, the bro ke r’s co m pe ns at io n was pri nc ip al ly the co m

m is si on pa idwhen th e p ro pe rty was s ol d t o ath irdpa rty. Befo re the y ears at i ss ue an d u nt il Sep te m be r 1, 2 00 8, M r. Bel l o pe rat edhi s real est at e b us in es s as a so le pro pr ie to rs hi p u nd er the tra de na m e Rea lty W or ld MBA. The pro pr ie to rs hi p was rep orte d a s M ic ha el Bel l & Ass oc ia te s o n the Bel ls ’ 20 08 Fed eral in co m e ta x re turn . As a res ul t o f th e in crea se inhi s R EO bu si ne ss , Mr. Bel l i nc or

po rat edhi s b us in es s b y

fil in g M BA’s art ic le s o f in co rp or at io n o n Au gu st4, 2 00 8. Onth e sa m e d ay th e Bel ls an d M BA ex ecu te d a le as e fo r th e b us in es s’ off ic e. Sh ortl y

th erea fte r, MBA re ne wedMr. Bel l’s fran ch is e li cen se ag reem en t wi th Real ty W or ld -No rth ernCal ifo rn ia , Inc ., for a ren ewal fee o f $2 50 . MBA’s or ga ni zat io n m in ut es were s ig ne d o ne m on thaft er th e art ic le s o f in co rp or at io n wer e fi le d, ap po in ti ng Mr. Bel l p res id en t an d treas ur er an d M rs . Bel l v ic e p res id en t an d s ecre tary . At ap pr ox im at el y th e sa m e ti m e th e bo ardof d ire ct or s au th or iz edMBA t o b ro ke r rea l es ta te un de r Mr. Be ll ’s li cen se an d t o p ur ch as e Mr. Be ll ’s so le pro pr ie to rs hi p. MBA an d M r. Bel l en te redin to a pu rch as e ag reem en t o n Oct ob er 1 , 20 08 . Fo r $2 25 ,00 0, M r. Bel l ag reedto sel l M BA “ [a]ll th e work i n p ro ces s, cu st om er li st s, co nt ract s, l ic en se s, fr an ch is e ri gh ts , tra de na m es , go odwil l, an d o th er t an gi bl e an d i nt an gi bl e as se ts of t ha t b us in es s kno wn as ‘ Rea lty W or ld- MBA’”. W

he n-5 -

[* 5] th e p ur ch as e ag reem en t was si gn ed , MBA h adno cap it al , no ass et s, an d n o sh areh ol de rs . W eek s af

te r th e p ur ch as e ag reem en t was si gn ed , MBA’s b oa rdof di rect or s re so lv edto is su e 2 50 sh ares to Mr. Bel l an d 2 50 sh ares to Mrs . Bel l i n ex ch an ge for$5 00 . No ap pr ai sa l was pe rfo rm ed . The $ 22 5,0 00 purch as e p ric e was de te rm in ed ex cl us iv el y

by the Bel ls . The Be ll s al lo cat ed$2 5,0 00 of t he pu rch as e p ric e to th e fiv e-year fran ch is e li cen se ag reem en t M r. Bel l en te redin to with R eal ty W or ld
North ernCal ifo rn ia , Inc ., in20 04 for$3 ,20 0. Th e rem ai ni ng $2 00 ,00 0 o f th e pu rch as e p ric e was all oc at edto 40 co nt ract s b etweenMr. Bel l an d v ari ou s l en de rs an d e nt it ie s t o a ss is t dur in g the REO pro ces s. Th e p ro pe rty subjec t t o 1 of t he 40 co nt ract s was so ldbe fo re Se pt em be r 1, 2 00 8, an d the Bel ls rece iv eda pa ym en t o f $1 0,8 00 forservi ces ren de redpu rs ua ntto th e co ntracton Sep te m be r 3, 2 00 8. On Sep te m be r 4, 2 00 8, M BA bo ok eda $1 0,8 00 acco un t re cei vabl e fo r th is co nt ract . Whe n the pu rch as e ag reem en t was en te redin to , th e o th er 3 9 c on tra ct s re qu ire d ad di ti on al servi ces by Mr. Bell ; an d the re was no cert ai nt y th atth es e co nt ract s wou ldpro du ce i nc om e. The pu rch as e ag reem en t s ta te s tha t the pu rch as e p ric e was pa y ab le in m on th ly ins ta ll m en ts of $ 10 ,00 0 o r m or e o n the fir stof e ach m on th an d tha t the unpa idpri nc ip al am ou ntwas s ub ject t o 1 0% i nt eres t ea chy ear. MB A di d n ot-6
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[* 6] pro vi de an y

sec ur ity for th e p ur ch as e p ric e, an d apro m is so ry no te was n ot ex ecu te d. Th e p ur ch as e p ric e was ev en tu al ly pai d i n fu ll , bu t M BA di d n otm ak e al l p aym en ts ti m el y . On the ir r eturns for

th e y ears at i ss ue th e Bel ls rep orte d a$5 ,00 0 c os t b as is in th e Rea lty

W or ldfran ch is e an d re po rte d l on g- te rm cap it al ga in fro m

th e tra ns act io n u si ng Fo rm

62 52 , Ins ta ll m en t Sa le Inc om e. The B el ls als o re po rte d the fo ll owi ng am ou nt s as in te res t p aym en ts : $ 4,6 88 for20 08 , $1 1,2 50 for20 09 , and $4 ,50 0 fo r 20 10 . MBA rep orte d s ub st an ti al ly the same am ou nt s as in te res t pa ym en ts on it s re tu rn s fo r th e y ears at i ss ue . MBA am orti zedth e $ 22 5,0 00 pu rch as e p ric e o ve r fi ve y ears . MBA ac cru ed$1 33 ,06 3.6 0 o f cu rren t ea rn in gs an d p ro fit s (E& P) i n 2 00 8. Fo ll owi ng th e $ 45 ,31 2 d is tri bu ti on to th e Bel ls , MBA h ad$8 7,7 51 .60 of accu m ul at edE&P atth e en d o f 20 08 . In 2 00 9 M BA acc ru edcurren t E&P of $1 78 ,79 0.6 0. Fo ll owi ng th e $ 10 8,7 50 di st rib ut io n t o the Bel ls , MBA h adan accu m ul at edE&P o f $1 57 ,79 2.2 0 a t the en d o f 20 09 . MBA acc ru edcurren t E&P of $3 7,5 62 .60 in20 10 . MBA’s cu rren t E&P for20 10 an d i ts accu m ul at edE&P o f $1 57 ,79 2.2 0 e xc eed edth e $ 53 ,00 0 d is tri bu te d t o the Bel ls in20 10 . The Bel ls ’ 20 08 return was du e b y Apri l 1 5, 2 00 9. Itwas n otfil edun ti l Ju ne 20 , 20 09 . MBA’s 20 08 tax return was du e b y Marc h 1 5, 2 00 9. Itwas m ai le d-7 -

[* 7] on Marc h 1 4, 2 00 9, an d was rece iv edon Marc h 2 2, 2 00 9. On Feb ru ary 7, 2 20 12 , res po nd en t s en t n ot ic es of d efi ci en cy forth e y ears at i ss ue to th e Bel ls an d MBA b y cert ifi edm ai l, d et erm in in g tha t the Bel ls ’ en ti re g ai n fr om th e sa le was or di na ry in co m e an d tha t M BA sh ou ldha ve am orti zedth e p ur ch as e p ric e o ve r 15 y ears . Befo re tria l the Co urt g ran te d re sp on de nt ’s m ot io n fo r le av e to fil e an am en dm en t t o the an swe r. In t he am en de d a ns wer res po nd en t ar gu es th atth e tra ns fer o f th e so le pro pr ie to rs hi p’s as se ts to MBA was a cap it al co nt rib ut io n subjec t t o s ect io n 3 51 , no t a s al e. Res po nd en t ar gu es th atpa ym en ts m ad e to th e Bel ls were i n fa ctdi vi de nd s an d tha t the ass et s tran sf erre d t o M BA m ay

no t b e am orti zedor d ep reci at ed . Dis cu ss io n I. Whe th er We May

Dete rm in e Wheth er a Def ic ie nc y Exi st s fo r 20 08 A. The Bel ls The Bel ls ’ pe ti ti on ass ert s tha t the st atut e o f li m it at io ns ba rs res po nd en t fro m ass es si ng or c ol le ct in g a ny defi ci en cy for20 08 . The Be ll s’ 20 08 return was du e b y Apri l 1 5, 2 00 9, b utitwas n otfil edun ti l J un e 2 0, 2 00 9. Th e st atut ory A Form 11 20 X, Am en de d U.S. Co rp or at io n In co m e Tax Return, fo r 20 08 2 was co m pl et edan d p res en te d t o re sp on de ntdu rin g the ex am in at io n b utwas n ot fil ed .-8
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[* 8] no ti ce o f de fic ie nc y

for20 08 was s en t t o the Bel ls vi a certi fie d m ai l o n Feb ru ary 7, 2 01 2. Sect io n 6 50 1( a) g en eral ly requ ire s tha t t ax es be ass es se d wi th in th ree years aft er a re tu rnis fil ed . The Co m m is si on er, h owe ve r, is ge ne ral ly precl ud edfro m m ak in g an a ss es sm en t u nt il a no ti ce o f de fic ie nc y is m ai le d t o the tax pa y er, dur in g th e p eri odwhen a ta xp ay er m ay fil e a p et it io n wi th th is Co urt, an d, i f a p et it io n i s fil ed , un ti l thi s C ou rt’s d eci si on be co m es fin al . Sec. 3 01 .62 13 -1 (a)( 2) , Pro ced . & Adm in . Reg s. We m ay

de te rm in e whe th er a d efi ci en cy ex is ts forth e Bel ls for 20 08 be cau se th e n ot ic e o f de fic ie nc y was i ss ue d b efo re the ex pi rat io n o f th e th ree- y ear p eri odsetby sect io n 6 50 1( a). B. MBA MBA’s p et it io n a ls o a ss ert s tha t the st atut e o f li m it at io ns ba rs res po nd en t fro m ass es si ng or c ol le ct in g a ny defi ci en cy for20 08 . MBA’s 20 08 return was m ai le d o n M arch 14 , 20 09 , andrece iv edon Marc h 2 2, 2 00 9. Th e 2 00 8 re tu rnwas du e, an d d eem edfil ed , onMarc h 1 5, 2 00 9. Th e n ot ic e o f de fic ie nc y , sen t v ia cert ifi edm ai l o n F eb ru ary 7, 2 01 2, was is su edbe fo re the ex pi rat io n o f th e th reey ear p eri odof l im it at io ns onass es sm en t. See sec s. 6 50 1, 6 21 3; sec . 30 1.6 21 3- 1( a)(2 ), Pro ced . & Adm in . Reg s. Acco rd in gl y , we m ay de te rm in e whe th er a de fic ie nc y

ex is ts forMBA fo r 20 08 .-9
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[* 9] II. Whe th er the Bel ls ’ Tran sf er o f Rea lty

W or ldMBA’s Ass et s t o M BA W as a Cap it al Co nt rib ut io n S ub ject t o S ect io n 3 51 The Bel ls an d M BA co nt en d tha t the tra ns fer o f th e so le pro pr ie to rs hi p’s as se ts to MBA was a sa le an d m us t b e tr eat edas s uc h fo r ta x p ur po se s. Res po nd en t as se rts th at , insubs tanc e, th e tr an sa ct io n was a cap it al co nt rib ut io n. Deci di ng th es e cas es on th e b as is of t he pre po nd eran ce o f th e ev id en ce, we ag ree with re sp on de ntan d h ol d tha t the tra ns fer o f as se ts to MBA was a cap it al co nt rib ut io n g ov ern edby sect io n 3 51 . A. Sub st an ce Ov er Fo rm The subs tanc e o f a tran sa ct io n, n otit s fo rm , is co nt ro ll in g fo r ta x p ur po se s. Greg ory v. Hel ve rin g, 2 93 U.S. 46 5, 4 69 -4 70 (19 35 ). Tran sf ers be twee n re la te d pa rti es , su chas M r. Bel l an d M BA, are s ub ject t o c lo se scrut in y

bu t d o n ot ne ces sa ril y

lac k e co no m ic subs tanc e. Hardm anv. Un it edSta te s, 8 27 F.2d14 09 , 14 12 (9t h C ir. 1 98 7) ; Am . Und erwri te rs , Inc . v. Co m m is si on er, T.C. Mem o. 1 99 6- 54 8. We m

us t d et erm in e whe th er the tra ns fer was a cap it al co nt rib ut io n o r a s al e crea ti ng a de bt or -cre di to r rel at io ns hi p. Whe n a n o ve ral l p lan i s ac co m pl is he d thr ou gh a se rie s o f st ep s, we m us t ev al ua te th e p lan, n oteach st ep , fortax pu rp os es . D’ Ang el o As so cs ., Inc . v. Co m m is si on er, 7 0 T.C. 1 21 , 12 9 (1 97 8) (“ Whe re a s eri es of c lo se ly relat edst ep s-1 0-

[* 10 ] are t ak enpu rs ua ntto a pl anto ach ie ve anin te nd edres ul t, the tra ns act io n m us t b e v ie wedas a n i nt eg rat edwho le fortax pu rp os es .”). The s ol e p ur po se of MBA’s o rg an iz at io n was to in co rp or at e Mr. Be ll ’s so le pro pr ie to rs hi p. Th e in se pa rab le rel at io ns hi p b etweenMBA’s o rg an iz at io n andth e tr an sf er o f th e so le pr op rie to rs hi p’s as se ts weig hs infav or of f in di ng th atth e tr an sf

er was a cap it al co nt rib ut io n, p art ic ul arl y inth e li gh t o f th e la ck

of e vi de nc e o f a b us in es s re as on fo r di vi di ng th e tr an sa ct io n. Se e id . at 1 29 -1 31 ; Ny e v . Comm is si on er, 5 0 T.C. 20 3, 2 11 -2 12 (19 68 ). Abs en t a s ti pu la ti on to th e co nt rary, an ap pe al inth es e cas es wou ldli e to th e Co urt o f App eal s fo r th e Nin thCir cu it . See s ec. 7 48 2( b) (1 )(A) an d (B ), (2 ); Gol se n v . Comm is si on er, 5 4 T.C. 7 42 , 75 7 (1 97 0) , aff’d, 4 45 F.2d98 5 (1 0t h C ir. 19 71 ). ThatCo urt o f App eal s ap pl ie s an 11 -fac to r te stto de te rm in e whe th er a sh areh ol de r’s tra ns fer t o aco rp or at io n i s a s al e o r a cap it al co nt rib ut io n. Hardm an , 82 7 F .2dat 1 41 1- 14 12 ; A. R. Lan tz Co . v. Un it edSta te s, 4 24 F.2d 13 30 , 13 33 (9t h C ir. 1 97 0) . No si ng le fact oris co nt ro ll in g, an d the fact s an d ci rcu m st an ces of e ach cas e m us t b e ta ke n i nt o c on si de rat io n. Hard m an , 82 7 F .2d at14 12 . The p rimary

pu rp os e o f th e fac to rs is to he lp th e Co urt d et erm in e th e pa rti es ’ in te nt“ th ro ug h the ir o bjec ti ve an d s ub jecti ve ex pr es si on s.” Am .-1 1-

[* 11 ] Und erwri te rs , Inc . v. Co m m is si on er, T.C. Mem o. 1 99 6- 54 8, s li p o p. at15 . W e ex am in e eac h fa ct orbe lo w.

1. Tit le of De btIns tru m en t The is su an ce o f a n ot e ev id en ces de bt , andth e is su an ce o f st oc k i nd ic at es an equi ty con tri bu ti on . Hardm an , 82 7 F .2dat 1 41 2. Mr . Bel l an d M BA ex ecu te d a pu rch as e ag reem en t tran sf erri ng th e so le pro pr ie to rs hi p’s as se ts to MBA fo r $2 25 ,00 0. Th e p ur ch as e ag reem en t p ro vi de s tha t the pu rch as e p ric e was to be pa idinin st al lm en ts of $ 10 ,00 0 o r m or e o n the fir stof e ach m on th . The u np ai d pr in ci pa l am ou ntwas s ub ject t o i nt eres t atth e an nu al rat e o f 10 %. In Hardm an , th e co urt n ot edth atth e d oc um en t atis su e in cl ud edword in g ty pi cal ly con ta in edin a p ro m is so ry

no te an d d idno t i nc lu de word in g ty pi cal ly con ta in edina st oc k cert ifi cat e. Id . Sim il arl y , th e wor di ng inth e p ur ch as e ag reem en t i s ty pi cal of a pr om is so ry

no te , anditdo es no t co nt ai n wo rd in g c omm on ly inc lu de d i n ast oc k cert ifi cat e. Thi s fa ct or

weig hs infav orof f

in di ng th atth e tr an sa ct io n was a sa le . 2. Ma tu rit y

Date A fix edm atur ity

da te is ev id en ce tha t a d eb t ex is ts be cau se itrequi res fu lfi ll m en t o f th e fi nanc ia l o bl ig at io n a t a s pe ci fic ti m e. NA Gen. P’sh ip & Subs . v. Co m m is si on er, T.C. Mem o. 2 01 2- 17 2. Th e la ckof afix edm atur ity da te , ho wev er, i nd ic at es th atpa ym en t i s l in ke d t o the su cces s o f th e b us in es s an d i s-1 2-

[* 12 ] ev id en ce o f anequi ty int eres t. Hard m an , 82 7 F .2dat 1 41 3. Th e p ur ch as e ag reem en t re qu ire s m on th ly paym en ts of a t l eas t $ 10 ,00 0 o n the fir stof e ach m on th . Whi le th e p ur ch as e ag reem en t d oe s n otsp eci fic al ly stat e th e d at e th atth e fin al paym en t wo ul d b e m ad e, itdo es requi re tha t re pa ym en t b e m ad e n o l at er tha n a fi xe d d at e. Thi s fa ct orweig hs infav orof f in di ng th atth e tr an sa ct io n was a sa le . 3. Paym en t So ur ce Paym en ts th atde pe ndon earn in gs or c om e fro m a res tri ct edso ur ce i nd ic at e anequi ty int eres t. Id .; NA Gen . P’shi p & Subs . v. Co m m is si on er, T.C. Mem o. 20 12 -1 72 . The p ur ch as e ag reem en t h as no cav eat s re ga rd in g p aym en t o f th e pu rch as e p ric e. On i ts face , th e p aym en ts were due ev enif M BA was no t pr of it ab le . This in te rp ret at io n i s s up po rte d b y ev id en ce p res en te d b y

th e Bel ls in di cat in g tha t o ne of the be ne fit s o f stru ctur in g the tra ns fer o f Rea lty W or ld MBA’s as se ts to MBA as a sa le was tha t the y wou ldrece iv e a s te ady

stream of in co m e eac h m on th “ fo r se ve ral y ears un ti l the pu rch as e p ric e was pa idoff witho ut co nc ernfor

[th e] up s an d d own s o f th e b us in es s wo rld .” Howev er, we can no t ig no re co m

m on sen se inm ak in g o uran al y si s. MBA ac qu ire d e ss en ti al ly all o f it s as se ts , whi chha d v ery li tt le , if an y , li qu id at io n v al ue , inex ch an ge for th e p ro m is e o f rep aym en t i n the pu rch as e ag reem en t. With ou t i nc om e itwou ldbe im po ss ib le forMBA t o m ak e an y-1 3-

[* 13 ] pa y m en ts du e und er the pu rch as e ag reem en t, an d re pa ym en t was co m pl et el y co nt in ge nton MBA’s earni ng s. Co ns eque nt ly, th is fact orweig hs infav orof fin di ng th atth e tr an sf

er was a cap it al co nt rib ut io n. 4. Ri gh t To Enfo rce P aym en ts The rig htto en fo rce p aym en t o f pr in ci pa l an d i nt eres t i s ev id en ce o f a d eb t. NA Gen. P’sh ip & Subs . v. Co m m is si on er, T.C. Mem o. 2 01 2- 17 2. MB A di d n ot pr ov id e an y

sec ur ity inco nn ect io n wi th it s p ro m is es to pa y . Whi le th e la ckof se cu rit y ge ne ral ly ind ic at es anequi ty int eres t, i t ca n b e le ss im po rtantin tra ns act io ns be twee n re la te d p art ie s. See , e.g., Am . Und erwri te rs , Inc . v. Co m m is si on er, T.C. Mem o. 1 99 6- 54 8. Whenth e tr an sf er o ccurred , MBA h ad ve ry li tt le cap it al an d n o h is to ry of r ep aym en t. If M BA ha d fa il edto pa y , Mr. Bel l’s re co ur se wou ldha ve be enli m it edto see ki ng to en fo rce t he rep aym en t ob li ga ti on s i n the purch as e ag reem en t. Inth e li gh t o f th e fac ts , we fin d tha t the la ckof asec ur ity

ag reem en t an d M r. Bel l’s re co ur se inth e ev en t o f MBA’s no np aym en t wei gh infav or of f in di ng th atth is tra ns act io n was a cap it al co nt rib ut io n.5. Parti ci pa ti on an d M an ag em en t An i nc reas e in a sh areh ol de r’s in te res t i n aco rp or at io n a s the res ul t o f a tra ns act io n i nd ic at es anequi ty int eres t. Hard m an , 82 7 F .2dat 1 41 3; NA Gen.-1 4-

[* 14 ] P’shi p & Subs . v. Co m m is si on er, T.C. Mem o. 2 01 2- 17 2. MB A hadno sh areh ol de rs when th e p ur ch as e ag reem en t was si gn ed , andth e Bel ls subs eque nt ly be cam e MB A’ s s ol e sh areh ol de rs . The tran sa ct io n d idno t af fectMr. Bel l’s own ers hi p i nt eres t. Thi s fa ct oris ne ut ral .

6. St atus inRel at io n t o Othe r Co rp or at e Cre di to rs Subo rd in at in g the rig htto rep aym en t t o ri gh ts of t he co rp or at io n’s o th er cred it or s g en eral ly ind ic at es anequi ty int eres t. Hardm an , 82 7 F .2dat 1 41 3; NA Gen . P’shi p & Subs . v. Co m mis si on er, T.C. Mem o. 2 01 2- 17 2. Th e p ur ch as e ag reem en t d oe s n otex pr es sl y subo rd in at e Mr. Be ll ’s rig htto rep aym en t t o ri gh ts of othe r cre di to rs , andth ere i s n o e vi de nc e th atitwas i n fa ctso subo rd in at ed . Co ns eque nt ly, th is fact oris ne utral .

7. Parti es ’ In te nt Whi le all 11 fact or s ar e in te nd edto he lp th e Co urt d is cern th e p art ie s’ in te nt io ns , th is fact orfoc us es ex cl us iv el y on ob jecti ve ev id en ce o f whe th er the pa rti es in te nd edforth e tr an sf er t o c reat e d eb t o r anequi ty int eres t. Hard m an , 82 7 F.2 d a t 1 41 3; NA Gen. P’sh ip & Subs . v. Co m m is si on er, T.C. Mem o. 2 01 2- 17 2; Am . Und erwri te rs , Inc . v. Co m m is si on er, T.C. Mem o. 1 99 6- 54 8. Itis cle ar fro m th e p art ie s’ evi de nc e th atth e Bel ls in te nd edto sel l the so le pro pr ie to rs hi p’s as se ts to MBA. The word in g i n the pu rch as e ag reem en t i s s im il ar t o tha t ty pi cal ly found-1 5-

[* 15 ] ina pr om is so ry

no te , andth e tr an sa ct io n was rep orte d a s a s al e fo r ta x pu rp os es . This fact orweig hs infav orof f in di ng th atth e tr an sf

er was a sa le . 8. Co rp or at io n’s Capi ta li zat io n Thi n c ap it al iz at io n t en ds to in di cat e th ata tr an sa ct io n i s a c ap it al co nt rib ut io n. Hard m an , 82 7 F .2dat 1 41 4; Am . Und erwri te rs , Inc . v. Co m m is si on er, T.C. Mem o. 1 99 6- 54 8. A co rp or at io n’s d eb t-t o- equi ty rati o i s de te rm in edby com

parin g a ll of aco rp or at io n’s l iabi li ti es to th e sh areh ol de rs ’ equi ty. Am . Und erwri te rs , Inc . v. Co m mis si on er, T.C. Mem o. 1 99 6- 54 8. When th e p ur ch as e ag reem en t was ex ecu te d, M BA ha d n o a ss et s b ecau se th e Bel ls ’ $5 00 cap it al co nt rib ut io n was no t m ad e unt il on or a fte r Oct ob er 1 5, 2 00 8. Ev enif the Bel ls ’ cas h c on tri bu ti on ha d b eenm ad e b efo re the ex ecu ti on of t he pu rch as e ag reem en t, MB A’ s capi ta li zat io n wo ul d h av e b eenex tre m el y th in . MBA’s in ad equa te cap it al iz at io n i s an in di cat io n tha t the tra ns act io n was a cap it al co nt rib ut io n. 9. Id en ti ty of In te res t Adv an ces m ad e b y

sh areh ol de rs inpro po rti on to th ei r st oc k o wne rs hi p in di cat e a capi ta l co nt rib ut io n. Hardm an , 82 7 F .2dat 1 41 3; NA Gen. P’sh ip & Subs . v. Co m

m is si on er, T.C. Mem o. 2 01 2- 17 2; Am . Und erwri te rs , Inc . v. Co m m is si on er, T.C. Mem o. 1 99 6- 54 8. “ A so le sh areh ol de r’s adva nc e is m or e-1 6-

[* 16 ] li ke ly comm it te d t o the ris k o f th e b us in es s tha n an a dv an ce fr om a cred it or who is no t a s ha reh ol de r.” NA Gen. P’sh ip & Subs . v. Co m m is si on er, T.C. Mem o. 20 12 -1 72 , sl ip op . at 3 4. Th e tr an sa ct io n t oo k p la ce b etweenMBA an d M r. Bel l. The factth atMr. an d M rs . Bel l l at er b ecame MBA’ s s ol e sh areh ol de rs in di cat es a cap it al co nt rib ut io n.

10 . Int eres t Pa idOnl y

W ith E&P Thi s fa ct orco ns id ers th e so ur ce o f in te res t p aym en ts an d i s ef fect iv el y th e sa m e as th e th irdfact or . Hardm an , 82 7 F .2dat 1 41 4. Anob li ga ti on to pay , and pa ym en t o f, a fi xe d ra te of i nt eres t i s anin di cat io n o f de bt . NA G en . P’shi p & Subs . v. Co m

m is si on er, T.C. Mem o. 2 01 2- 17 2. Th e p ur ch as e ag reem en t p ro vi de s th atin te res t s ha ll accrue onth e unp ai d p rin ci pa l atth e an nu al rat e o f 10 %. Tho ug h the pu rch as e ag reem en t d oe s n otco nd it io n the pa ym en t o f in te res t o n the co rp or at io n’s h av in g E&P , paym en t o f in te res t wo ul d b e p os si bl e o nl y if M BA ge ne rat edin co m e. Thi s fa ct orweig hs infav orof f in di ng th atth e tr an sa ct io n was a cap it al co nt rib ut io n.

11 . Abi li ty T o Ob ta in Loan s Fr om Oth er So ur ces The co rp or at io n’s ab il ity

to bo rro w fun ds fro m

a th irdpa rty ind ic at es a de bt . Hardm an , 82 7 F .2dat 1 41 4; NA Gen. P’sh ip & Subs . v. Co m mis si on er, T.C. Mem o. 2 01 2- 17 2. “ If n o re as on ab le cred it orwou ldha ve so ldpro pe rty to t he-1 7-

[* 17 ] co rp or at io n wi th paym en ts to be m ad e inth e fu ture, anin fere nc e ari se s tha t a rea so nabl e sh areh ol de r wou ldno t d o s o e ithe r.” Hardm an , 82 7 F .2dat 1 41 4. The re i s n o e vi de nc e in th e rec or d a s t o wh ethe r MBA wo ul d h av e b eenab le to ob ta in a lo anfro m

a th irdparty. MBA was a n ewly org an iz ed , th in ly capi ta li zed bu si ne ss . W e d o n otbe li ev e th atanarm ’s-le ng th cred it orwou ldha ve be enwil li ng to len d M BA $2 25 ,00 0 o n t erm s an d c on di ti on s the same as th os e inth e p ur ch as e ag reem en t. Thi s fa ct orweig hs infav orof f in di ng th atth e tr an sa ct io n was a cap it al co nt rib ut io n. So m e o f th e ab ov e 1 1 fa ct or s ar e n eu tra l, o th ers weig h i n fa vo r of fin di ng th atth e tr an sa ct io n c reat eda de bt or -cre di to r rel at io ns hi p, an d o th ers fav orfin di ng th atitcrea te d a n e qu ity

in te res t. Co ns id eri ng all of t he fact or s t og ethe r, we be li ev e th atth ey

weig h i n fa vo r of

fin di ng th atth e tr an sa ct io n was insubs tanc e a cap it al co nt rib ut io n. B. Whe th er Se ct io n 3 51 Gov ern s the Tax C on se qu en ces of t he Tran sa ct io n Sect io n 3 51 (a) p ro vi de s: “ No g ai n o r lo ss sh al l b e rec og ni zedif p ro pe rty is tra ns ferr edto a co rp or at io n b y on e o r m or e p ers on s s ol el y inex ch an ge forst oc k i n su chco rp or at io n a ndimm ed ia te ly after t he ex ch an ge su chpe rs on or p ers on s ar e in co nt ro l * * * of t he co rp or at io n.” Pers on (s ) ha ve co nt ro l i f th ey ownst oc k po ss es si ng at l eas t 8 0% o f: (1 ) th e to ta l co m bi ne d v ot in g p owe r of

all of t he-1 8-

[* 18 ] co rp or at io n’s v ot in g s to ck an d (2 ) th e to ta l num

be r of sh ares of a ll of t he co rp or at io n’s o th er cl as se s o f st oc k. Se c. 36 8( c). The ap pl ic at io n o f se ct io n 3 51 is m an da to ry

if a ll of t he requi rem en ts are m et . Ny e v . Comm is si on er, 5 0 T.C. at 20 9. Insubs tanc e, inord er t o i nc or po rat e Mr. Be ll ’s exi st in g b us in es s, the Bel ls tra ns ferr ed$5 00 incas h a ndall of t he so le pro pr ie to rs hi p’s as se ts to MBA s ol el y in ex ch an ge for

MBA’s s to ck . The Be ll s wer e in co nt ro l o f MBA i m m ed ia te ly aft er the tra ns fer o f cas h b ecau se th ey be cam e MB A’ s s ol e sh areh ol de rs . Thu s, se ct io n 3 51 go ve rn s the tax co ns eque nc es of t hi s tran sa ct io n. III. Tax Co ns eque nc es to th e Bel ls A. Com pl et edCo nt ractPurp orte dl y Tran sf erre d t o M BA Acco un ts rece iv ab le m ay be tra ns ferr edto a ne wly fo rm edco rp or at io n i n a se ct io n 3 51 tra ns act io n. Se e Hem ptBro s., In c. v. Un it edSta te s, 4 90 F.2d11 72 (3 d C ir. 1 97 4) ; Re v. Ru l. 8 0- 19 8, 1 98 0- 2 C .B. 11 3. Ho wev er, i t i s a l on gs tand in g pr in ci pl e th atin co m e m

us t b e ta xe d t o the on e who earn s i t, an d a tt em pt s t o a ss ig n in co m e to an ot he r en ti ty are no t re co gn iz edforFed eral tax pu rp os es . See Lu cas v. Earl , 28 1 U.S. 1 11 (19 30 ). The sal e o f pr op erty

subjec t t o 1 of t he 40 co ntract s tha t was pu rp orte dl y so ldto MBA cl os edon Sep te m be r 1, 2 00 8, an d the $1 0,8 00 pay m en t was rece iv ed-1 9-

[* 19 ] on Sep te m

be r 3, 2 00 8. Be cau se pa ym en t was rece iv edbe fo re the da te th at th e co nt ractwas tran sf

erre d t o M BA, itcan no t b e co ns tru edas a n “ acco un t rece iv ab le ” fo r pu rp os es of s ect io n 3 51 . The Be ll s s ho ul d h av e in cl ud edth e $1 0,8 00 inth ei r in co m e. B. Div id en ds Mo ne y di st rib ut edto a sh areh ol de r ou t o f a co rp or at io n’s E&P is co ns id ered a d iv id en d a ndsh al l b e in cl ud edingro ss in co m e. Secs . 30 1( a), (c) , 31 6, 3 17 (a). To the ex te ntth ata co rp or at io n h as E&P, th ey are g en eral ly con si de redth e so ur ce of co rp or at e d is tri bu ti on s. Sec . 31 6( a). Si nc e we h av e d et erm in edth atth e Bel ls ’ tra ns fer o f th e so le pro pr ie to rs hi p’s as se ts to MBA was a cap it al co nt rib ut io n, MBA’s p aym en ts to th e Bel ls inth e y ears at i ss ue m us t b e tr eat edas d is tri bu ti on s, no t i ns ta ll m en t p aym en ts . Becau se MBA’s E&P i n e ach of t he se y ears ex ceed ed th e am ou ntdi st rib ut edto th e Bel ls , th e d is tri bu ti on s s ho ul d b e tr eat edas d iv id en ds fo r ta x p ur

po se s. IV. Tax Co ns eque nc es to MBA MBA’s i ni ti al ba si s i n a ll of t he pro pe rty it re cei ve d i n c on ne ct io n wi th th e se ct io n 3 51 tra ns act io n was th e sa m e as th e Bel ls ’ ba si s i n the pro pe rty. See sec . 36 2( a). Inad di ti onto th e am ou ntMBA p ai d t o re ne w th e franc hi se li cen se ag reem en t, MB A wil l as su m e Mr. Be ll ’s bas is inth e franc hi se li cen se ag reem en t.-2 0-

[* 20 ] On the ba si s o f th e ev id en ce p res en te d, i t ap pe ars th atth e Bel ls ha d n o b as is in th e tr an sf

erre d c on tra ct s o r go od wil l. Pu rs ua ntto sec ti on 36 2( a), b ecau se MBA ha s n o b as is inth es e it em s the y m ay no t b e d ep reci at edor a m orti zed . To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te red pu rs uantto Ru le 15 5.