Court Opinion

ID: 4473156
Source: CourtListenerOpinion
Date Created: 2020-01-14 19:35:08.87043+00
Date Added: 2024-06-11T14:53:48.323272
License: Public Domain

Colvin, J., concurring: I agree with the majority that section 1041 applies to the redemption of Ms. Read’s stock and with its analysis supporting that result. I also concur in the result as to Mr. Read for reasons stated herein. I. Thesis: Section 1041 and Q&A-9 Apply Broadly and Prevent Nonsymmetrical Treatment of Spouses The issue of whether, or how, section 1041 applies to redemptions incident to a divorce has been difficult for private parties, the Government, and the courts.1 Despite this past difficulty, this concurring opinion argues that section 1041 can provide predictable and fair results, with minimal risk of nonsymmetrical treatment of spouses, based on two principles. The first principle is (a) that Congress intended section 1041 to provide a broad rule of nonrecognition for transfers of property between spouses and former spouses incident to divorce, and (b) that section 1.1041-lT(c), Q&A-9, Temporary Income Tax Regs. (Q&A-9), 49 Fed. Reg. 34453 (Aug. 3, 1984), fully implements that intent for economically equivalent transactions involving third parties, including redemptions of stock held by one spouse. The second principle is that, if applied according to their terms, section 1041(b) and corresponding language in the penultimate sentence of Q&A-9 fully achieve the congressional purpose of avoiding whipsaw to the Government in cases where section 1041(a) applies by specifying how we treat the nontransfer-ring spouse; i.e., “deeming” certain facts to have occurred. That is, under section 1041(b) and the penultimate sentence of Q&A-9, Ms. Read is deemed to have transferred her MMP stock to Mr. Read, and Mr. Read is deemed to have transferred it to MMP to be redeemed. Thus, if section 1041(a) applies, we are required to assume that the stock MMP redeemed was Mr. Read’s, not Ms. Read’s. Application of these two principles will properly implement congressional intent both for section 1041(a), in making transactions between spouses tax free, and section 1041(b), in ensuring against whipsaw of the Government. For convenience in this concurring opinion, I refer to this analysis as the “section 1041(b)-Q&A-9 theory.” The dissenting opinion of Judge Ruwe emphasizes the importance of achieving symmetrical results between spouses in the stock redemption context if section 1041 applies. However, it does not rely on the section 1041(b)-Q&A-9 theory. Instead, it would apply what, for convenience, I will call the “primary and unconditional obligation requirement” theory, derived from law developed before section 1041 was enacted. In this concurrence, I contend that the section 1041(b)-Q&A-9 theory is as effective in preventing whipsaw in the stock redemption context if section 1041(a) applies as the primary and unconditional obligation requirement theory and that the former is clearly incorporated in section 1041, its legislative history, and Q&A-9, and the latter is not. Further, I believe it is not for the courts to create barriers to qualifying for nonrecognition treatment under section 1041(a) and Q&A-9 that were not provided by the Congress or the Secretary. II. Section 1041 Applies Broadly to Transactions Between Divorcing Spouses No gain or loss is recognized on a transfer of property from an individual to a former spouse if the transfer is incident to divorce. See sec. 1041(a)(2).2 The phrase “incident to divorce” is broad, suggesting that Congress intended section 1041(a)(2) to apply broadly. See Arnes v. United States, 981 F.2d 456, 458, 460 (9th Cir. 1992) (Arnes I); Blatt v. Commissioner, 102 T.C. 77, 79 (1994). That reading is corroborated by the report of the Ways and Means Committee accompanying enactment of section 1041 in 1984, which states in pertinent part: The committee believes that, in general, it is inappropriate to tax transfers between spouses. This policy is already reflected in the Code rule that exempts marital gifts from the gift tax, and reflects the fact that a husband and wife are a single economic unit. The current rules governing transfers of property between spouses or former spouses incident to divorce have not worked well and have led to much controversy and litigation. Often the rules have proved a trap for the unwary as, for example, where the parties view property acquired during marriage (even though held in one spouse’s name) as jointly owned, only to find that the equal division of the property upon divorce triggers recognition of gain. The committee believes that to correct these problems, and make the tax laws as unintrusive as possible with respect to relations between spouses, the tax laws governing transfers between spouses and former spouses should be changed. [H. Rept. 98-432 (Part 2), at 1491-1492 (1984)]. The Ways and Means Committee also said in its report: This nonrecognition rule applies whether the transfer is for the relinquishment of marital rights, for cash or other property, for the assumption of liabilities in excess of basis, or for other consideration and is intended to apply to any indebtedness which is discharged. * * * [Id. at 1492.] Thus, Congress made clear that it intended section 1041(a) to apply broadly to transactions between divorcing spouses.3  III. Q&A-9 Extends Section 1041 Broadly to Transfers on Behalf of the Nontransferring Spouse Incident to Divorce Section 1.1041-lT(c), Q&A-9, Temporary Income Tax Regs.,4 extends section 1041(a) to transfers of property by a spouse (transferring spouse) to a third party on behalf of a former spouse (nontransferring spouse). To qualify, the transfer must be “on behalf of” the transferring spouse. The temporary regulations do not define or limit the term “on behalf of”. Q&A-9, as applied to divorcing spouses, properly implements section 1041(a) because it recognizes that section 1041 applies not only to transfers to the other spouse, but also to transfers to a third party "on behalf of” that other spouse. Like section 1041(a), this facilitates the division of a marital estate incident to divorce without taxation to the spouse who is withdrawing assets from the marital estate. There is no suggestion in the regulations that the “on behalf of” language has any purpose other than to make Q&A-9 apply as broadly as section 1041(a) does; i.e., to transactions made to divide a marital estate. The language of section 1041(a), its legislative history, and the language of Q&A-9 clearly support the view of the majority that the “on behalf of” standard in Q&A-9 is satisfied if the transfer was “in the interest of” or was made by the transferring spouse acting “as a representative of” the non-transferring spouse. Majority op. p. 36. I disagree with the contention in Judge Ruwe’s dissenting opinion, infra pp. 46-55, that Q&A-9 applies to redemptions only if the redemption satisfies a primary and unconditional obligation of the spouse whose stock is not being redeemed. As stated by the majority, that requirement is not contained in or implied by the phrase “on behalf of”. I also disagree with the contention in the dissenting opinion of Judges Laro and Marvel that Q&A-9 does not apply to corporate redemp-tions or that it applies only to transfers to a third party to satisfy an obligation owed by the nontransferring spouse to the third party. By their terms, section 1041(a) and Q&A-9 apply broadly to transfers of property “incident to divorce”, which are “on behalf of” the other (nontransferring) spouse. By choosing the “on behalf of” language, the Secretary appropriately defined eligibility for section 1041(a) broadly, as did Congress. Q&A-9 does not state that it does not apply to redemptions, or that it applies only to transfers to a third party to satisfy an obligation owed by the nontransferring spouse to the third party. Where the Secretary uses broad language to provide eligibility for a rule of nonrecognition, we need not and ought not supply our own exceptions. Application of section 1041 and Q&A-9 to redemptions furthers the legislative purpose of making a transfer of property incident to divorce tax free in the case of a closely held corporation owned by a married couple. In his dissent, infra p. 49, Judge Ruwe points out that in the instant cases and prior cases, “the Commissioner has consistently treated Q&A-9 as applying to divorce-related corporate redemptions, and this position has been adopted by the U.S. Court of Appeals for the Ninth Circuit in Arnes v. United States, 981 F.2d 456 (9th Cir. 1992).” IV. Section 1041(b) and Q&A-9 Provide for Avoidance of Whipsaw Section 1041(b)5 is intended to ensure that the Government is not whipsawed as a result of inconsistent positions taken by former spouses. Section 1041(b) provides that, in the case of any transfer of property to which section 1041 applies, (1) the transferee is treated as if he or she acquired the property by gift and (2) the transferee takes the basis of the transferor. The Ways and Means Committee report accompanying enactment of section 1041 clearly stated the importance of avoiding whipsaw in cases where section 1041(a) applies. That committee report states: Furthermore, in divorce cases, the government often gets whipsawed. The transferor will not report any gain on the transfer, while the recipient spouse, when he or she sells, is entitled under the Davis rule to compute his or her gain or loss by reference to a basis equal to the fair market value of the property at the time received. ‡ ‡ # # 4? # Thus, uniform Federal income tax consequences will apply to these transfers notwithstanding that the property may be subject to differing state property laws. [H. Rept. 98-432 (Part 2), supra at 1491-1492.] As quoted supra note 4, the penultimate sentence of Q&A-9 implements the antiwhipsaw rule of section 1041(b) by providing: 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. Thus, under section 1041(b) and Q&A-9, the following is deemed to occur if section 1041(a) applies to Ms. Read: 1. She is deemed to transfer her stock to Mr. Read. 2. Mr. Read is deemed to immediately transfer the stock to MMP. Pursuant to the divorce judgment, Mr. Read elected for MMP to pay Ms. Read and to issue a promissory note to her. However, despite these actual facts, because (in my view) section 1041(a) applies here, section 1041(b) and Q&A-9 specifically require us to analyze this transaction as if the stock were Mr. Read’s at the time of the redemption.6  V. Should the Payment by MMP to Ms. Read Be Deemed To Be Made to Mr. Read? Section 1041 and Q&A-9 do not state that the payment from MMP to Ms. Read is deemed to be made to Mr. Read and then to Ms. Read.7 However, it is undisputed that, because (in my view) section 1041(a) applies, under section 1041(b) and Q&A-9 we are to treat Ms. Read’s stock redeemed by MMP as if it were Mr. Read’s. A stock owner would normally have the right to receive payment made in redemption of his or her stock. Since we are required to treat Mr. Read as the owner of Ms. Read’s MMP stock, it is thereby implied that we must attribute normal rights of stock ownership to him. Thus, to give reasonable effect to section 1041(b) and the penultimate sentence of Q&A-9, we should treat Mr. Read as having a right to receive any payment MMP makes in redemption of what is deemed to be his stock, and thus he constructively receives any payment MMP makes in redemption of that stock to Ms. Read under general income tax principles. See Lucas v. Earl, 281 U.S. Ill (1930). VI. How Is Mr. Read Taxed? Mr. Read and MMP indicated in their motion their belief that the primary and unconditional standard applies to section 1041, and that if section 1041 applies to Ms. Read’s redemption of her MMP stock, respondent’s determinations in the notices of deficiency issued to Mr. Read and MMP should be sustained. I concur with that result but for different reasons. Under the analysis of section 1041 and Q&A-9 herein, Mr. Read would be taxed on the constructive dividend he received on the transfer of Ms. Read’s stock to MMP, not as a result of his litigating position in this case. Since Mr. Read constructively received mmp’s payment to Ms. Read, he is taxable on it as a dividend under sections 302(d), 301(a), and 316.8  VII. Primary and Unconditional Standard A payment to a shareholder in redemption of stock is a constructive dividend to the remaining stockholder if the nonredeeming stockholder had a primary and unconditional obligation to buy the stock. See, e.g., Arnes II; Hayes v. Commissioner, 101 T.C. 593, 606 (1993); Edler v. Commissioner, T.C. Memo. 1982-67, affd. 727 F.2d 857 (9th Cir. 1984). The dissenting opinion of Judge Ruwe advocates the primary and unconditional obligation requirement theory to avoid whipsaw. See Judge Ruwe’s dissent, infra pp. 49-50. Under that view, the remaining shareholder (here, Mr. Read) would be taxed only if the transfer of the redemption proceeds satisfied a primary and unconditional obligation of his to Ms. Read. Because under that analysis the remaining shareholder would often escape taxation, to achieve symmetry Judge Ruwe would permit the departing shareholder (here, Ms. Read) to exclude gain or loss under section 1041(a) only if the transfer of the redemption proceeds satisfied a primary and unconditional obligation of the remaining shareholder. If followed consistently in cases where section 1041(a) applies, both the section 1041(b)-Q&A-9 theory and the primary and unconditional obligation requirement theory would ensure symmetry. Thus, I disagree with the suggestion that, to achieve symmetry in the treatment of spouses, we need to apply the “primary and unconditional obligation requirement” theory to determine eligibility for section 1041(a) or Q&A-9. Congress clearly specified in section 1041(b) that, if section 1041(a) applies, we must treat the nontransferring spouse as the owner of the transferring spouse’s property. Thus, assuming section 1041(a) applies, the question here is not how Mr. Read is taxed if MMP redeems Ms. Read’s stock, even though those are the actual facts; instead, the question is how Mr. Read is taxed if MMP redeems his stock, because those are the deemed facts for “all purposes” under the income tax. Sec. 1041(b). The Secretary specifically implemented that concept in the penultimate sentence of Q&A-9. As a result, symmetry is achieved without the need to apply the primary and unconditional obligation requirement to the nontransferring spouse. Further, it is not for the courts to create their own barriers to qualifying for nonrecognition treatment under section 1041(a) and Q&A-9 not provided by Congress or the Secretary (e.g., imposition of a primary and unconditional obligation requirement, or creation of an exception for redemption transactions). VIII. Conclusion I concur because the analysis of the majority is fully consistent with the analysis in this concurring opinion. Parr, Whalen, Foley, Vasquez, and Gale, JJ., agree with this concurring opinion.   Compare, e.g., Arnes v. United States, 981 F.2d 456 (9th Cir. 1992) (Arnes 1), with Arnes v. Commissioner, 102 T.C. 522 (1994) (Arnes II).    Sec. 1041(a) and (c) provides as follows: 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. (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.    Sec. 1.1041-1T(c), Q&A—9, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984), provides: 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.    Sec. 1041(b) provides: SEC. 1041(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.    See Arnes I, 981 F.2d at 459, where the U.S. Court of Appeals for the Ninth Circuit used an analysis similar to the sec. 1041(b)-Q&A-9 analysis described here; that is, the court treated the transferring spouse as having constructively transferred her stock to the nontransferring spouse, who then transferred the stock to the corporation.    If sec. 1041 and Q&A-9 apply, the transferring spouse recognizes no gain or loss under sec. 1041(a) on that spouse’s actual or deemed transfer of property to the nontransferring spouse. This is true even if the transferring spouse receives or is deemed to receive consideration from the nontransferring spouse for that property. See sec. 1.1041-1T(c), Q&A-10, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984). Under sec. 1041(b), the nontransferring spouse (here, Mr. Read) who actually receives property or is deemed to receive property from the transferring spouse has a basis in such property equal to the adjusted basis thereof in the hands of the transferring spouse. This is true even if the nontransferring spouse pays or is deemed to pay the transferring spouse consideration for that property. See sec. 1.1041-1T(c), Q&A — 11, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984).    MMP had earnings and profits well in excess of the redemption payments during the years in issue.