Court Opinion

ID: 4472320
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:22:55.141931+00
Date Added: 2024-06-11T15:03:23.757507
License: Public Domain

Ruwe, J., dissenting: I disagree with the majority because I believe that the Court of Appeals for the Ninth Circuit, to which this case is appealable, has already passed on the determinative legal issue. In Arnes v. United States, 981 F.2d 456 (9th Cir. 1992), the Court of Appeals considered the same transaction that is presently before us. The ultimate issue in Arnes was whether section 1041 shielded Mrs. Arnes (Joann) from recognizing gain when a corporation (Moriah), in which she and her husband (John) owned stock, redeemed her shares as part of a divorce settlement. Section 1041 generally provides that no gain or loss shall be recognized on a transfer of property from an individual to a spouse or former spouse incident to a divorce. Section 1041 does not apply to transfers to third parties. However, section 1.1041-1T, Q&A-9, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984), asks the following question: “May transfers of property to third parties on behalf of a spouse (or former spouse) qualify under section 1041?” (Emphasis added.) The question assumes the fact that the transfer to the third party was “on behalf of” the nontransferring spouse. The answer in the temporary regulation also assumes this, stating: “Yes. There are three situations in which a transfer to a third party on behalf of a spouse (or former spouse) will qualify under section 1041”. One of those situations is where the transfer was required by a divorce or separation agreement. It is clear from the regulation and the opinion of the Court of Appeals in Arnes v. United States, supra, that not every transfer from one spouse to a third party, pursuant to a divorce, will qualify for nonrecognition under section 1041. Rather, only those made “on behalf of” the nontransferring spouse can qualify. As explained by the Court of Appeals: The regulation explains that in certain cases a transfer of property to a third party “on behalf of” a spouse or former spouse should be treated as a transfer to the spouse or former spouse. Id. at Q-9, A-9. One example supplied in the regulation is the case where the transfer to the third party is required by a divorce or separation instrument. Such a 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. Temp. Treas. Reg. §1.1041-1T, A-9 (1992). The example suggests that the tax consequences of any gain or loss arising from the transaction would fall upon the nontransferring spouse for whose benefit the transfer was made, rather than upon the transferring spouse. Consistent with the policy of the statute, which is to defer recognition until the property is conveyed to a party outside the marital unit, the regulation seems to provide for shifting the tax burden from one spouse to the other, where appropriate. Thus, a transfer by a spouse to a third party can be treated as a transfer to the other spouse when it is “on behalf of” the other spouse. Whether the redemption of Joann’s stock can be construed as a transfer to John, pursuant to the regulation example in A-9, depends upon the meaning of “on behalf of.” * * * [Arnes v. United States, supra at 458-459.] The temporary regulation gives no guidance as to the criteria for determining when such a transfer will be deemed to be “on behalf of” the nontransferring spouse. Acknowledging that there were no cases directly on point, the Court of Appeals analyzed whether Moriah’s redemption of Joann’s stock was on behalf of John by looking to the established legal precedents concerning constructive dividends. The Court of Appeals observed 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. If an employer pays an employee’s income tax, that payment is income to the employee. See Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 729-31, 49 S.Ct. 499, 504, 73 L.Ed. 918 (1929). If a corporation assumes a shareholder’s bank note in exchange for stock, the shareholder receives a taxable constructive dividend.[1] Schroeder v. Commissioner, 831 F.2d 856, 859 (9th Cir. 1987). [Id. at 459.] The Court of Appeals went on to explain that its holding in Schroeder that the taxpayer had received a constructive dividend, was based on its conclusion that “The taxpayer had the primary obligation to repay the loan, and the corporation’s assumption of the loan relieved the taxpayer of that obligation.” Arnes v. United States, supra at 459 (emphasis added). The majority has expressed no disagreement with the Court of Appeals’ use of constructive dividend principles for determining that Joann’s transfer to Moriah was “on behalf of” John,2 and the Court of Appeals’ articulation of those principles is consistent with those stated by the majority. I recognize that the majority opinion in Blatt v. Commissioner, 102 T.C. 77, 82 (1994), stated that “we do not agree with Arnes and respectfully refuse to follow it.” Unfortunately, the majority opinion in Blatt failed to give any reasons for its disagreement with the Court of Appeals. Id. at 84-85 (Halpern, J., concurring), 85-86 (Beghe, J., concurring). Indeed, as pointed out in Judge Chiechi’s concurrence in Blatt v. Commissioner, supra at 86, it seems to have been totally unnecessary to announce a disagreement with Arnes v. United States, supra.3  It appears to me that the Blatt majority’s real disagreement was with the District Court’s opinion in Arnes where the District Court indicated that Moriah’s redemption of Joann’s stock would be considered to be “on behalf of” John if he received “any benefit”. See Blatt v. Commissioner, supra at 84 (Halpern, J., concurring), 85 (Beghe, J., concurring). However, the opinion of the Court of Appeals in Arnes was based on its de novo review of the facts and law. Arnes v. United States, supra at 458. The Court of Appeals’ opinion did not adopt the District Court’s view that the redemption would be “on behalf of” John if he derived any benefit. Therefore, any error perceived in the District Court’s rationale in Arnes is irrelevant. Despite the majority’s suggestion to the contrary, there is no disagreement between the tax law principles enunciated in Arnes and those stated in Edler v. Commissioner, 727 F.2d 857 (9th Cir. 1984), affg. T.C. Memo. 1982-67. In Edler, the Court of Appeals for the Ninth Circuit agreed in principle that if a corporation’s redemption of Mrs. Edler’s stock was in discharge of Mr. Edler’s obligation to purchase her stock, then the amount paid to Mrs. Edler would be a constructive dividend to Mr. Edler. Prior to their divorce, Mr. and Mrs. Edler owned all the stock of the corporation. The original divorce judgment obligated Mr. Edler to purchase Mrs. Edler’s stock interest. However, a subsequent nunc pro tunc order placed that responsibility on the corporation. The Commissioner’s argument that the nunc pro tunc order should not be given any effect for tax purposes was rejected by the Court of Appeals, but only because the Commissioner had not raised this argument in the lower court. Had the argument been made in the lower court, the result might well have been different. See Hayes v. Commissioner, 101 T.C. 593 (1993). In fact, the Court of Appeals noted that “If it were not for the entry of the nunc pro tunc order, Commissioner’s position would be correct”. Edler v. Commissioner, supra at 859.4  Having analyzed the meaning of the term “on behalf of” by looking to the appropriate principles of tax law for determining whether the redemption was a constructive dividend to John, the Court of Appeals in Arnes proceeded to determine whether the redemption relieved John of his obligation to purchase Joann’s stock. Whether such an obligation existed must be resolved by reference to State law. Hayes v. Commissioner, supra at 600. The Court of Appeals in Arnes looked at the very same transaction and divorce property settlement that is presently before us and held that John Arnes had an obligation to Joann Arnes that was relieved by Moriah’s payment to Joann. That obligation was based in their divorce property settlement, which called for the redemption of Joann’s stock. Although John and Joann were the sole stockholders in Moriah, the obligation to purchase Joann’s stock was John’s, not Moriah’s. Furthermore, John personally guaranteed Moriah’s note to Joann. Under Washington law, Joann could sue John for payment without suing Moriah. See Wash. Rev. Code Ann. §62A.3-416(1) (West 1979). * * * [Arnes v. United States, 981 F.2d at 459.] Because the Court of Appeals held that John, not the corporation, was obligated to purchase Joann’s stock, the court concluded that the redemption was used to satisfy John’s obligation and therefore was “on behalf of” John. Using the formulation in section 1.1041-IT, Q&A-9, Temporary Income Tax Regs., supra, the Court of Appeals held that Joann’s transfer of stock should be treated as a constructive transfer to John, who then transferred the stock to Moriah. * * * [Arnes v. United States, supra at 459.5] In direct opposition to the determination by the Court of Appeals, the majority concludes that “petitioner did not have a primary and unconditional obligation to acquire Joann’s stock” (majority op. p. 528) and that “Under applicable Washington State law, the property settlement agreement created at most a secondary obligation, which could only mature on Moriah’s default on its primary obligation.”6 Majority op. p. 529. The obligation to purchase Joann’s stock was either John’s obligation or the corporation’s. There were no other possibilities. The Court of Appeals, cognizant of Washington State law and looking at the same property settlement agreement and surrounding facts, held that “the obligation to purchase Joann’s stock was John’s, not Moriah’s.”7 Arnes v. United States, supra at 459 (emphasis added). We should accept the Court of Appeals’ determination as controlling rather than attempt to reexamine it. The Court of Appeals’ holding is squarely in point with the determinative issue in the instant case. “[Bjetter judicial administration requires us to follow a Court of Appeals decision which is squarely in point where appeal from our decision lies to that Court of Appeals and to that court alone.” Golsen v. Commissioner, 54 T.C. 742, 757 (1970) (fn. refs, omitted), affd. 445 F.2d 985 (10th Cir. 1971). If, however, the majority disagrees with the Court of Appeals over the application of Washington State law to the undisputed facts, it is incumbent on the majority to explain why it disagrees. Nevertheless, there is no explanation or rationale in the majority opinion on this point.8 The only cases cited by the majority deal with guarantees, not with the issue of who had the original primary obligation to purchase Joann’s stock.9 In lieu of an explanation, we simply are left with an ex cathedra proclamation that the Court of Appeals was wrong and no guidance for the disposition of future cases.10  The Court of Appeals was aware that respondent had asserted a protective income tax deficiency against John and that John was contesting the deficiency in the instant case. Arnes v. United States, supra at 457. The Court of Appeals clearly contemplated that John would be treated as the person who redeemed stock from the corporation and that he, rather than his wife, would incur the tax consequences. Thus, the court stated: Joann’s transfer of stock should be treated as a constructive transfer to John, who then transferred the stock to Moriah. The $450,000 was paid to Joann by Moriah on behalf of John. The transfer of $450,000 from the corporate treasury need not escape taxation, if we hold, as we do, that Joann is not required to recognize any gain on the transfer of her stock, because it is subject to section 1041. The tax result for Joann is the same as if she had conveyed the property directly to John. [Arnes v. United States, supra at 459.] The result we reach today directly contradicts the holding of the Court of Appeals to which the instant case is appeal-able, fails to explain why we disagree with the Court of Appeals, and produces an untenable result in that neither of the two stockholders of Moriah will incur any tax consequences as a result of the $450,000 stock redemption. Parker, Swift, Gerber and Halpern, JJ., agree with this dissent.  This is identical to what we recently stated in Hayes v. Commissioner, 101 T.C. 593, 599 (1993): A shareholder also receives a constructive dividend to the extent of available earnings and profits when a corporation agrees to perform that shareholder’s obligation and that shareholder’s obligation is thereby extinguished. See Maher v. Commissioner, 469 F.2d 225, 229 (8th Cir. 1972), affg. in part, revg. and remanding on another issue 55 T.C. 441 (1970); Sullivan v. United States, supra at 728 n.5. * * *    Curiously, the majority states that it “does not express an opinion as to whether the standard of ‘on behalf of’ the spouse in sec. 1.1041-1T(c), Q&A-9, * * * is the same as the primary and unconditional obligation rule applicable to a constructive dividend.” Majority op. pp. 529-530 note 3.    In Blatt v. Commissioner, 102 T.C. 77, 83 (1994), the majority acknowledged that the facts in Arnes are easily distinguishable from the facts at hand. First, in Arnes, the Court of Appeals stated that McDonald’s Corp. required complete ownership of a franchise by an owner/operator after the divorce; no such requirement is present here with respect to ownership of corporation. Second, in Ames, the Court of Appeals stated, in dicta, that the taxpayer’s former husband was obligated to become the sole owner of the franchise; such is not the case here. Third, in Arnes, the taxpayer’s former husband guaranteed the corporation’s obligation to the taxpayer; by contrast, Blatt did not guarantee corporation’s payment to petitioner. Fourth, unlike Washington, Michigan is not a community property State.    I agree with the majority that Edler v. Commissioner, 727 F.2d 857 (9th Cir. 1984), affg. T.C. Memo. 1982-67, is still legal precedent in the Ninth Circuit, and I assume that the Court of Appeals was well aware of its own opinion in Edler when it decided Arnes.    It is true that the Court of Appeals did not have the question of John’s tax liability before it. However, its conclusion was based on the application of law to undisputed facts identical to those in the instant case. It held that John, not Moriah, was legally obligated to purchase his wife’s stock.    The majority’s conclusion does not purport to rely on any material facts that were not before the Court of Appeals for the Ninth Circuit, and I am unable to discern any material differences between the statement of facts in the majority opinion and those in the opinion of the Court of Appeals. Both were decided by summary judgment because there were no genuine issues as to any material fact and therefore decision could be rendered as a matter of law.    The majority states, majority op. p. 530, “To the extent this is suggested by the Court of Appeals for the Ninth Circuit in Arnes v. United States, supra, we conclude that the obligation is not primary and unconditional, and the statement constitutes dictum.” The context in which the foregoing sentence appears makes it somewhat unclear what the majority is characterizing as “dictum”. However, if the majority is saying that the Ninth Circuit’s holding that John, not Moriah, was obligated to purchase Joann’s stock was “dictum”, I must disagree. Arnes makes it clear beyond doubt that its holding that John, and not Moriah, was obligated to purchase Joann’s stock was absolutely determinative of the outcome of that case and not “dictum”. If anything should be characterized as “dictum”, it is our disagreement with Arnes in Blatt where the majority failed to specify why it disagreed with the Court of Appeals and observed that the facts in Blatt were easily distinguishable.    At a minimum, one would expect an analysis of the impact of the combination of unique facts that made the instant case “easily distinguishable” from Blatt. See supra note 3.    According to the Court of Appeals’ holding, the guarantees only came into being when the corporation relieved John of his initial personal obligation to purchase his wife’s stock.    Whatever the Blatt majority’s disagreement with Arnes may have been, it seems improbable that it involved the application of State law in determining that John, not Moriah, was obligated to purchase Joann’s stock. Indeed, the legal analysis in Blatt does not even mention State law. Nor did the taxpayer in Blatt claim that the redemption satisfied any obligation of her husband. Blatt v. Commissioner, supra at 81-82.