Case Name: Carol M. Read, et al., Petitioners v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 2000-02-04
Citations: 114 T.C. 14
Docket Number: Docket Nos. 19001-97, 19322-97, 19328-97
Parties: Carol M. Read, et al., Petitioners v. Commissioner of Internal Revenue, Respondent
Judges: Cohen, Chabot, Parr, Whalen, Colvin, Foley, Vasquez, and Gale, JJ., agree with this majority opinion.
Reporter: Reports of the Tax Court of the United States
Volume: 114
Pages: 14–72

Head Matter:
Carol M. Read, et al., Petitioners v. Commissioner of Internal Revenue, Respondent
Docket Nos. 19001-97, 19322-97, 19328-97.
Filed February 4, 2000.
Mark A. Brown, for petitioner in docket No. 19001-97.
Karen É. Lewis and D. Michael O’Leary, for petitioners in docket Nos. 19322-97 and 19328-97.
Robert W. Dillard, for respondent.
Cases of the following petitioners are consolidated herewith: Mulberry Motor Parts, Inc., docket No. 19322-97, and William A. Read, docket No. 19328-97.

Opinion:
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). (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). 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, 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 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 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.
‡ ^ Jfc # #
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.
‡ ifc ‡ # #
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.
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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.
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 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 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 nonvoting 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 may be, shall have right of prepayment without penalty. The note delivered to Wife shall be personally guaranteed by Husband.
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 1st of the month following the payment of such items. Husband's obligation to pay temporary alimony is subject to prior termination 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 1st 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 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.
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). 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 Section 607.134, Florida Statutes:
RESOLVED, that it is advisable and in the best interest 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 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];
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 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 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 percent (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 Dol lars ($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 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 Mullins v. Sunshine State Serv. Corp., 540 So. 2d 222, 223 (Fla. Dist. Ct. App. 1989); Anderson v. Trade Winds Enters. Corp., 241 So. 2d 174, 177 (Fla. Dist. Ct. App. 1970), and Mr. Read was secondarily liable on MMP's installment promissory note, see West Flagler Associates, Ltd. v. Department of Revenue for Fla., 633 So. 2d 555, 556-557 (Fla. Dist. Ct. App. 1994); Scott v. City of Tampa, 30 So. 2d 300, 302 (Fla. Dist. Ct. App. 1947).
The stock pledge agreement referred to in and attached to the stock purchase agreement was entered 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:
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 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 nonvoting 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.
* ifc % % #
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 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.
ifc Hí ‡ ‡
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 at issue, MMP's ESOP owned 4,961 shares of class B nonvoting common stock of MMP.
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 that the principal payment under the installment promissory note that MMP made to her during each of those years constitutes long-term capital gain. 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.
The underlying common issue presented in the cross-motions for partial summary judgment is whether section 1041 applies to the transfer by Ms. Read to MMP of her stock in that company. It is Ms. Read's position that section 1041 applies to that transfer, while Mr. Read and MMP take the position that it does not. Respondent's role here is that of a stakeholder. Nonetheless, respondent has indicated that "Ms. Read has the better argument that she should not recognize any gain from the sale of her stock pursuant to I.R.C. §1041."
Section 1041 provides in pertinent part:
SEC. 1041. TRANSFERS OF PROPERTY BETWEEN SPOUSES OR INCIDENT TO 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 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 section 1041. Those temporary regulations provide that the transferor of property under section 1041 is to recognize no gain or loss on the transfer, regardless of whether the transfer is in exchange for consideration. See sec. 1.1041-lT(c), Q&A-10, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984). The temporary regulations under section 1041 further provide that in all transfers subject to that section the basis of the transferred property in the hands of the transferee is the adjusted basis of such property in the hands of the transferor immediately before the transfer, regardless of whether the transfer is a bona fide sale in which the transferee pays the transferor consideration for the transferred property. See sec. 1.1041-1T(c), Q&A-11, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984).
The temporary regulations under section 1041 also describe the circumstances in which a transfer of property by a spouse to a third party on behalf of a spouse or former spouse qualifies as a transfer to which section 1041 applies. See sec. 1.1041-lT(c), Q&A-9, Temporary Income Tax Regs. (Q&A-9), 49 Fed. Reg. 34453 (Aug. 31, 1984). Q&A-9 provides in pertinent part:
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 section 1041, 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 section 1041.
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, section 1041(a) prescribes nonrecognition treatment to her with respect to her transfer of MMP stock to MMP. Mr. Read and MMP counter that Ms. Read's February 5, 1986 transfer of MMP stock was not a transfer of property to a third party on behalf of Mr. Read within the meaning of Q&A-9 and that that transfer does not fit within either of the first two situations (or the third situation) described in that temporary regulation. Consequently, according to Mr. Read and MMP, section 1041(a) does not pro vide nonrecognition treatment to Ms. Read with respect to Ms. Read's February 5, 1986 transfer of MMP stock.
In advancing their respective positions, Ms. Read and Mr. Read and MMP argue that Hayes v. Commissioner, 101 T.C. 593 (1993), Arnes v. Commissioner, 102 T.C. 522 (1994), and Blatt v. Commissioner, 102 T.C. 77 (1994), prescribe the legal standard that we must apply in order to determine whether Ms. Read's transfer of her MMP stock to MMP constitutes a transfer of property by a spouse (the transferring spouse, here Ms. Read) to a third party (here MMP) on behalf of a spouse (the nontransferring spouse, here Mr. Read) within the meaning of Q&A-9 (on-behalf-of standard). According to petitioners, those cases establish that the on-behalf-of standard may be satisfied in the instant cases only if Mr. Read had a primary and unconditional obligation to purchase Ms. Read's MMP stock, such that under established principles of tax law (constructive-dividend decisional law), see, e.g., Sullivan v. United States, 363 F.2d 724, 728-729 (8th Cir. 1966); Smith v. Commissioner, 70 T.C. 651, 668 (1978), Mr. Read received a constructive dividend (to the extent of MMP's earnings and profits) as a result of MMP's payment to Ms. Read of the consideration stated in the. divorce judgment in redemption of her stock (primary-and-unconditional-obligation standard).
We disagree with petitioners that Hayes v. Commissioner, supra, Arnes v. Commissioner, supra, and Blatt v. Commissioner, supra, require us to apply the primary-and-unconditional-obligation standard as to Mr. Read in order to determine whether the on-behalf-of standard in Q&A-9 is satisfied in the instant cases. As respondent correctly points out, this Court has not expressed an opinion on whether the on-behalf-of standard in Q&A-9 is the same as the primary-and-unconditional-obligation standard in constructive-dividend decisional law. See Arnes v. Commissioner, supra at 529 n.3, which this Court decided after it decided Hayes v. Commissioner, supra, and Blatt v. Commissioner, supra. We find petitioners' reliance on those three cases to support their view that in the instant cases the on-behalf-of standard in Q&A-9 is the same as the primary-and-unconditional-obliga tion standard in constructive-dividend decisional law to be misplaced.
The only issue that we decided in Hayes v. Commissioner, supra, was whether the redemption by JRE, Inc. (jre), a corporation owned by the taxpayer Ms. Hayes and the taxpayer Mr. Hayes, who was her former spouse, of Ms. Hayes' JRE stock resulted in a constructive dividend to Mr. Hayes. The role of the Commissioner of Internal Revenue (Commissioner) in Hayes, like respondent's role in the instant cases, was that of a stakeholder. Nonetheless, the Commissioner argued in Hayes v. Commissioner, supra, that the tax incurred as a result of the redemption of Ms. Hayes' JRE stock should be borne by Mr. Hayes. That was because, according to the Commissioner, JRE's redemption of Ms. Hayes' stock constituted a constructive dividend to Mr. Hayes since at the time of that redemption he had a primary and unconditional obligation to buy that stock from her. See id. at 597. On the facts presented, we held that Mr. Hayes received a constructive dividend as a result of that redemption because when JRE redeemed Ms. Hayes' JRE stock, it satisfied Mr. Hayes' primary and unconditional obligation to purchase that stock from Ms. Hayes. See id. at 605. Having so held, we stated:
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 section 1041 shields Ms. Hayes from 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 section 1041 issue in Ms. Hayes' case moot. [Id. at 606; emphasis added.]
We did not decide any issue in Hayes under Q&A-9 and section 1041.
Similarly, the only issue that we decided in Arnes v. Commissioner, supra, was whether the redemption by a corporation known as Moriah, which was owned equally by the taxpayer Mr. Arnes who was before us and his former spouse Ms. Arnes, who was not before us, of Ms. Arnes' Moriah stock resulted in a constructive dividend to Mr. Arnes. See Arnes v. Commissioner, supra at 527. The Commissioner's position in Arnes was that at the time of that redemption Mr. Arnes had a primary and unconditional obligation to buy Ms. Arnes' Moriah stock. Therefore, according to the Commissioner, he received a constructive dividend as a result of Moriah's redemption of that stock. In support of that position, the Commissioner argued that, under Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971), the conclusion of the U.S. Court of Appeals for the Ninth Circuit in Arnes v. United States, 981 F.2d 456, 459 (9th Cir. 1992), that the obligation to purchase Ms. Arnes' stock was Mr. Arnes' obligation, and not the obligation of Moriah, controlled our decision in Arnes v. Commissioner, 102 T.C. 522 (1994). The Commissioner did not ask us in Arnes v. Commissioner, supra, to determine whether the on-behalf-of standard in Q&A-9 was met as a result of the transfer by Ms. Arnes, who was not a party before us in that case, of her Moriah stock to that company. With respect to the Commissioner's reliance on Golsen, we held in Arnes v. Commissioner, supra at 529:
Golsen v. Commissioner, supra, does not apply because Arnes v. United States, supra, does not address the legal issue here: whether there is a constructive dividend to petitioner [Mr. Arnes]. That case concerned the tax consequences to Joann [Ms. Arnes] under section 1041. We note that petitioner was not a party in Arnes [v. United States, supra], and Joann had a possibly adverse position to petitioner in that case.i !
On the facts presented, we found that Mr. Arnes did not have a primary and unconditional obligation 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 id. at 528- 529. We did not decide any issue in Arnes under Q&A-9 and section 1041.
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 Blatt v. Commissioner, 102 T.C. 77 (1994). In Blatt, the taxpayer Ms. Blatt and her husband Mr. Blatt each owned 50 percent of the stock of a corporation known as Phyllograph. See id. at 78. Unlike the divorce judgment involved in the instant cases, but like the divorce decree involved in Arnes v. Commissioner, supra, the divorce decree in Blatt provided in pertinent part:
IT IS FURTHER ORDERED and ADJUDGED that the parties, being equal stockholders, shall cause Phyllograph Corp. to redeem plaintiffs [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 id. at 78. Ms. Blatt did not report any of the proceeds that she received from Phyllograph in redemption of her stock. The Commissioner determined that Ms. Blatt realized and must recognize long-term capital gain as a result of that redemption. See id. Ms. Blatt took the position in Blatt v. Commissioner, supra, that the redemption of her stock by Phyllograph qualified as a transfer of property to a third party on behalf of Mr. Blatt under Q&A-9 that was not taxable to her under section 1041(a). See id. at 80. In support of her position, Ms. Blatt relied principally on Arnes v. United States, supra. We rejected Ms. Blatt's position and indicated that we disagreed with Arnes v. United States, supra. See id. at 82-83.
In Blatt v. Commissioner, supra at 81, we addressed the meaning of the phrase "on behalf of" in Q&A-9. We stated that "The term 'on behalf of' means 'in the interest of' or 'as a representative of', Webster's Ninth New Collegiate Dictionary (1990)". Id. We found that Ms. Blatt did not claim, see id. n.12, and that "the record does not indicate that petitioner [Ms. Blatt] was acting in the interest of [Mr.] Blatt or as a representative of [Mr.] Blatt at the time of the redemption." Id. We also indicated in Blatt that "A transfer that satisfies an obligation or a liability of someone is a transfer on behalf of that person". Id. We found that "petitioner [Ms. Blatt] does not claim, and the record does not indicate, that the redemption satisfied any obligation of [Mr.] Blatt." Id. at 81-82. We further concluded that Ms. Blatt did not otherwise show that she was acting on behalf of Mr. Blatt. See id. n.12. We found that Ms. Blatt failed to show error in respondent's determination to treat the redemption involved there as a taxable event to her. We held:
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] 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 Blatt v. Commissioner, supra, that only if the primary-and-unconditional-obligation standard is satisfied as to the nontransferring spouse may a transfer by the transferring spouse to a corporation of such transferring spouse's stock in that corporation be considered to be a transfer of property by a spouse to a third party on behalf of the nontransferring spouse within the meaning of Q&A-9. Moreover, the illustration that we gave in Blatt of a transfer of property by a spouse to a third party that satisfies an obligation or a liability of the other spouse, which we indicated in Blatt is one type of transfer by a transferring spouse that constitutes a transfer of property to a third party on behalf of a nontransferring spouse within the meaning of Q&A-9, did not implicate the primary-and-unconditional-obligation standard. If, as petitioners contend here, we had concluded in Blatt v. Commissioner, 102 T.C. 77 (1994), a case which, like the instant cases, involved a corporate redemption in a divorce setting, that satisfaction of the primary-and-unconditional-obligation standard as to the non-transferring spouse is the only way in which the on-behalf-of standard in Q&A-9 may be met in the case of such a redemption, we would have expressly so stated. We did not.
We have rejected petitioners' reliance on Hayes v. Commissioner, 101 T.C. 593 (1993), Arnes v. Commissioner, 102 T.C. 522 (1994), and Blatt v. Commissioner, supra, to support their view that in the instant cases the on-behalf-of standard in Q&A-9 is the same as the primary-and-unconditional-obligation standard in constructive-dividend decisional law. We shall now decide whether Ms. Read's February 5, 1986 transfer of MMP stock will satisfy the on-behalf-of standard in Q&A-9 only if, as petitioners argue, the primary-and-unconditional-obligation standard is satisfied as to Mr. Read. We hold that the primary-and-unconditional-obligation standard is not an appropriate standard to apply in the instant cases in order to 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 further hold that 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.
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 nontransfer-ring 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. However, Q&A-9 does 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.
The 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 section 1041 are satisfied). The transfer that must be analyzed under constructive-dividend decisional law in order to determine whether the primary- and-unconditional-obligation standard is satisfied and whether a stockholder whose stock is not being redeemed received a constructive dividend is the transfer by the redeeming corporation of the redemption proceeds to the stockholder whose stock is being redeemed. In contrast, the transfer that must be analyzed under Q&A-9 in the present cases (and in any case involving a corporate redemption in a divorce setting) in order to determine whether the on-behalf-of standard in Q&A-9 is satisfied and whether the stockholder whose stock is being redeemed (here Ms. Read, the transferring spouse) is not required to recognize gain or loss under section 1041 is the transfer by that transferring spouse of the stock being redeemed (property) to the redeeming corporation (here MMP, a third party). Only if that transfer is made on behalf of the spouse whose stock is not being redeemed (here Mr. Read, the nontransferring spouse) does the transfer of property (here MMP stock) by the transferring spouse (here Ms. Read) to a third party (here MMP) satisfy the on-behalf-of standard in Q&A-9.
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 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 Blatt v. Commissioner, 102 T.C. at 81.
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 Blatt v. Commissioner, supra, a transfer of property would be consid ered a transfer of property by the transferring spouse to a third party on behalf of the nontransferring spouse within the meaning of Q&A-9. We find that it did not. Under the divorce judgment, Mr. Read's obligation to purchase Ms. Read's MMP stock for the consideration stated in that judgment was owed to Ms. Read. Ms. Read's transfer of her MMP stock to MMP (i.e., the transferring spouse's transfer of property to a third party) did not satisfy that obligation of Mr. Read to Ms. Read.
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 Blatt v. Commissioner, supra at 81, Ms. Read's transfer of her MMP stock to MMP was a transfer of property by the transferring spouse to a third party on behalf of the nontransferring spouse within the meaning of Q&A-9. We indicated in Blatt that the common, ordinary meaning of the phrase "on behalf of" in Q&A-9 is "in the interest of" or "as a representative of". See id. at 81 (quoting Webster's Ninth New Collegiate Dictionary (1990)). Applying that meaning to the facts in the instant cases, we find that Ms. Read was acting as Mr. Read's representative in transferring her MMP stock to MMP, and that Ms. Read was acting in the interest of Mr. Read in making that transfer to MMP, in that 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. Absent Mr. Read's election, Ms. Read was obligated under that judgment to transfer that stock to Mr. Read. We hold that Ms. Read's transfer to MMP of her MMP stock was a transfer of property by Ms. Read to a third party on behalf of Mr. Read within the meaning of Q&A-9.
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 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 section 1041(a), no gain shall be recognized by Ms. Read as a result of that transfer. Mr. Read and MMP have indicated that if the Court were to find, as we have, that section 1041 applies to Ms. Read's transfer of her MMP stock to MMP, the determinations in the respective notices issued to Mr. Read and to MMP relating to that transfer should be sustained. Consequently, those determinations have become moot, and we shall not address them.
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.
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 re-characterized Ms. Read's motion as a motion for partial summary judgment.
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.
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 Fla. Stat. Ann. sec. 607.134 (West 1977) (current version at Fla. Stat. Ann. sec. 607.0821 (West 1993)). By executing the document entitled "ACTION BY WRITTEN CONSENT OF THE BOARD OF DIRECTORS OR MULBERRY MOTOR PARTS, INC.", the three directors of MMP obviated the requirement under Florida law to hold a meeting at which such directors could adopt, by a majority vote, a resolution authorizing MMP, inter alia, to repurchase all of Ms. Read's MMP stock. See Fla. Stat. Ann. sec. 607.121 (West 1977) (current version at Fla. Stat. Ann. sec. 607.0824 (West 1993 & Supp. 1999)).
The notice issued to Ms. Read did not relate to Ms. Read's taxable year 1988.
The parties stipulated that Ms. Read's basis in the MMP stock that she owned was zero.
Mr. Read and MMP indicated in their motion that if the Court were to hold that sec. 1041 applies to Ms. Read's transfer of her MMP stock to MMP, the determinations in the respective notices issued to Mr. Read and to MMP should be sustained.
For convenience, we shall refer only to a spouse, and not to a former spouse.
We had consolidated the cases of Ms. Hayes and Mr. Hayes for trial, briefing, and opinion.
Any suggestion in Hayes v. Commissioner, 101 T.C. 593 (1993), that the Commissioner's concession under sec. 1041 as to Ms. Hayes is confirmed by Q&A-9 is dictum.
Ms. Arnes was the taxpayer before the U.S. Court of Appeals for the Ninth Circuit in Arnes v. United States, 981 F.2d 456 (9th Cir. 1992), discussed below.
We stated in n. 3 referred to in the foregoing excerpt from Arnes v. Commissioner, 102 T.C. 522, 529 n.3 (1994):
This majority opinion does not express an opinion as to whether the standard of "on behalf of" the spouse in sec. 1.1041-lT(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 [Arnes v. Commissioner, supra] is consistent with our conclusion in Blatt v. Commissioner, 102 T.C. 77 (1994), also a Court-reviewed opinion.
Unlike the divorce judgment involved in the instant cases, the divorce decree in Arnes v. Commissioner, supra, provided that Ms. Arnes and Mr. Arnes were to cause Moriah to redeem from Ms. Arnes her Moriah stock. See id. at 524.
The issue in Arnes v. United States, supra, was whether the redemption of Ms. Arnes' Moriah stock pursuant to the divorce decree involved there constituted a transfer of property by Ms. Arnes, the taxpayer before the Court of Appeals for the Ninth Circuit in that case, to a third party on behalf of Mr. Arnes within the meaning of Q&A-9. The Court of Appeals for the Ninth Circuit, the court to which an appeal in Ms. Read's case would normally lie, noted, inter alia, that "Generally, a transfer is considered to have-been made 'on behalf of' someone if it satisfied an obligation or a liability of that person." Id. at 459. On the facts presented, that court held that the transfer by Ms. Arnes of her Moriah stock to Moriah "did relieve John [Mr. Arnes] of an obligation", id., and that that transfer constituted a transfer to a third party on behalf of Mr. Arnes under Q&A-9, see id.
In Ingham v. United States, 167 F.3d 1240 (9th Cir. 1999), the Court of Appeals for the Ninth Circuit revisited the meaning of the phrase "transfer of property to a third party on behalf of a spouse" in Q&A.-9. In Ingham, the Court of Appeals rejected the taxpayer's expansive definition of that phrase, which included "all transfers of property that result in a substantial benefit, in any form, to the nontransferring or former spouse", because it found such a definition to be inconsistent with Arnes v. United States, supra. According to the Court of Appeals in Ingham v. United States, supra at 1244:
The focus of the court's analysis in Arnes [u. United States, supra] was not whether the plaintiffs [transferring spouse's] former husband had received some general benefit as a result of the plaintiffs transaction, but rather whether the transaction had satisfied some legal obligation or liability owed by her former husband. * † s
The Court of Appeals held in Ingham v. United States, supra, that, because the taxpayer's sale in question to a third party did not satisfy any such obligation or liability of the taxpayer's former spouse, the taxpayer was not entitled to nonrecognition treatment with respect to that sale under sec. 1041. See id. at 1245.
We stated in Blatt v. Commissioner, 102 T.C. 77, 83 (1994):
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.
Nor did we indicate in Blatt v. Commissioner, supra, that the common, ordinary meaning (i.e., the dictionary definition) of the phrase "on behalf of' which we cited with approval and on which we relied in that case is to be applied for purposes of Q&A-9 only to factual contexts that were not even involved in Blatt, i.e., to factual contexts other than corporate redemptions. In addition, we did not indicate in Blatt that the additional meaning of the phrase "a transfer [of property] on behalf of" someone which we cited with approval and on which we relied in that case, i.e., "A transfer [of property] that satisfies an obligation or a liability of someone", is the only meaning that can be attributed to the on-behalf-of standard in Q&A-9 in the context of corporate redemptions.
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. Commissioner, supra at 81.]
Nor did we conclude in Blatt v. Commissioner, supra, as has been suggested, that Q&A-9 may never apply to a corporate redemption in a divorce setting. To the contrary, as discussed above, we concluded in Blatt that Ms. Blatt could have established that she made a transfer of property to a third party on behalf of Mr. Blatt within the meaning of Q&A-9 if she had shown that at the time she transferred to Phyllograph her stock in that company (1) she was acting in the interest of Mr. Blatt, (2) she was acting as his representative, or (3) the transfer of her Phyllograph stock to that corporation satisfied an obligation or a liability of Mr. Blatt. See id. at 82 & n.12. If we had concluded in Blatt that, as a matter of law, Q&A-9 and sec. 1041 may never apply to a corporate redemption in a divorce setting, we would have expressly so stated. We did not.
The Court of Appeals for the Ninth Circuit in Arnes v. United States, 981 F.2d 456 (9th Cir. 1992), held that Q&A-9 and sec. 1041 applied in the case of a corporate redemption in a divorce setting. Although in Blatt we expressed our disagreement with the holding in Arnes v. United States, supra, our disagreement with that holding was not based upon our conclusion that, as a matter of law, Q&A-9 and sec. 1041 may never apply in the case of a corporate redemption in a divorce setting. See Blatt v. Commissioner, supra.
Consequently, we need not resolve the parties' dispute over whether the primary-and-unconditional-obligation standard is satisfied as to Mr. Read.
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 sec. 1041 in the case of a corporate redemption in a divorce setting. Constructive-dividend decisional law does not apply the primary-and-unconditional-obligation standard to determine the tax consequences to the stockholder whose stock is being redeemed and who is analogous to the transferring spouse under Q&A-9 and sec. 1041 in the case of a corporate redemption in a divorce setting. In contrast, sec. 1041 prescribes the tax consequences to the transferring spouse of a transfer of property by that spouse to the nontransferring spouse. Q&A-9 addresses a transfer of property by the transferring spouse to a third party on behalf of the nontransferring spouse. In the case of such a transfer, Q&A-9 and sec. 1041 provide nonrecognition treatment to the transferring spouse whose stock is being redeemed (provided that the other requirements of Q&A-9 and sec. 1041 are satisfied). In the case of a corporate redemption in a divorce setting, Q&A-9 and sec. 1041 do not address the tax consequences to the nontransferring spouse whose stock is not being redeemed, although Q&A-9 makes it clear that if that temporary regulation applies, the non-transferring spouse is deemed to have immediately transferred to a third party, in a transaction that does not qualify for nonrecognition treatment under sec. 1041, the property that such spouse is deemed to have received from the transferring spouse. However, neither Q&A-9 nor sec. 1041 prescribes the tax consequences to the nontransferring spouse as a result of that deemed transfer. Instead, that tax treatment is determined by other provisions of the Internal Revenue Code.
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.
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.
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 pri mary-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.
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.
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.
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 Feb. 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 Feb. 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 that 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.
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 sec. 1041 apply to Ms. Read's transfer of her MMP stock to MMP.
Sec. 1041 also applies broadly to transactions between nondivorcing spouses, but that situation is not present in the instant cases.