Court Opinion

ID: 4473160
Source: CourtListenerOpinion
Date Created: 2020-01-14 19:35:08.899379+00
Date Added: 2024-06-11T14:53:48.335422
License: Public Domain

Laro and Marvel, JJ., dissenting: The majority holds today that section 1.1041-lT(c), Q&A-9 (Q&A-9), Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984), permits a spouse1 to avoid recognizing gain which she realized from a redemption of her stock in connection with her divorce. Because we do not believe that section 1041, either textually or as interpreted in Q&A-9, applies to stock redemptions incident to divorce, we respectfully dissent. We summarize the critical facts of this case as follows. In connection with his divorce from Ms. Read, Mr. Read agreed to purchase Ms. Read’s stock in MMP at a stated price, or, at his election, to cause MMP to redeem Ms. Read’s stock. Mr. Read elected under the terms of their divorce judgment to cause MMP to redeem the stock in his stead. MMP authorized the redemption and entered into a binding stock purchase agreement with Ms. Read. Pursuant to that agreement, in 1986, MMP redeemed Ms. Read’s stock, paid Ms. Read $200,000 toward the redemption price, and issued Ms. Read a promissory note representing the balance of the redemption price. MMP paid Ms. Read $50,000 of the promissory note’s principal during each year in issue. The majority concludes that Ms. Read is not taxable on the subject gains resulting from her transfer of stock to MMP. The majority reasons that “Q&A-9 applies to Ms. Read’s February 5, 1986, transfer of MMP stock and * * *, pursuant to section 1041(a), no gain shall be recognized by Ms. Read as a result of that transfer.” Majority op. p. 38. The majority fails to discuss persuasively the fact that not only did Ms. Read transfer her stock to MMP, but that MMP paid her for that stock as well, nor does the majority explain persuasively why the capital gain that Ms. Read realized on the sale of her stock to a third party (MMP) is excluded from her gross income by virtue of either: (1) A statutory provision (section 1041) that applies only to transfers between spouses or (2) a regulatory provision (Q&A-9) that extends section 1041’s reach to certain transfers to third parties on behalf of a spouse. Congress enacted section 1041 in 1984. Before that time, an interspousal transfer of property for adequate consideration was a taxable transaction for Federal income tax purposes; a transferring spouse was taxed on a transfer of appreciated property to his or her spouse, and the recipient spouse received a basis in the transferred property equal to its fair market value on the date of transfer. See United States v. Davis, 370 U.S. 65 (1962). Congress enacted section 1041 to change that result. See H. Rept. 98-432 (Part 2), at 1491-1492 (1984). As enacted, section 1041 applies to defer the recognition of gain or loss on an interspousal transfer of property until the time that the recipient spouse transfers the property outside of the marital economic unit consisting of both spouses together. See Blatt v. Commissioner, 102 T.C. 77, 79-80 (1994). There is nothing in the text of section 1041 that suggests section 1041 applies to cases such as this where one spouse transfers property to a third party and receives payment in return. The Commissioner issued temporary regulations under section 1041 pursuant to his general regulatory authority to “prescribe all needful rules and regulations for the enforcement of this title”. Sec. 7805(a). These temporary regulations consist solely of section 1.1041-1T, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984), which, in turn, consists of 18 groups of a question and an answer. In one of these groups, namely, Q&A-9, the Commissioner set forth his position that section 1041 reaches certain “transfers of property to third parties on behalf of a spouse”. Q&A-9 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. Such consent or ratification must state that the parties intend the transfer to be treated as a transfer to the nontransferring spouse (or former spouse) subject to the rules of section 1041 and must be received by the transferor prior to the date of filing of the transferor’s first return of tax for the taxable year in which the transfer was made. 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. Nowhere in Q&A-9, or, for that matter, in any of the other Q&A’s, do we read that a gain arising from a spouse’s sale of assets to a third party qualifies for nonrecognition treatment under section 1041. As we understand the majority opinion, a spouse such as Ms. Read does not have to recognize the gain from the redemption of her stock by virtue of section 1.1041-1T(c), Q&A-10 (Q&A-10), Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984). We disagree. Although Q&A-10 does state that “The transferor of property under section 1041 recognizes no gain or loss on the transfer even if the transfer was in exchange for the release of marital rights or other consideration”, nothing in that Q&A (or in any of the other Q&A’s) extends that nonrecognition treatment to a transfer of property that is in essence a sale of stock by a spouse to a third party. Q&A-10 simply addresses interspousal transfers of property which otherwise would be considered sales for Federal income tax purposes; i.e., when one spouse transfers stock to the other spouse in exchange for its value in cash. As we understand the breadth of Q&A-9, with a fair reading of our reviewed opinion in Blatt v. Commissioner, 102 T.C. 77 (1994), in mind, Q&A-9 does not reach a transfer of property by a spouse to a third party where the transfer is, in substance and in form, a sale to the third party. Rather, we believe, Q&A-9 is limited to those situations in which a spouse transfers property to a third party in satisfaction of an obligation that is owed (or a gift that is made) by the non-transferring spouse to the third party. In the latter cases, Q&A-9 operates to tax the nontransferring spouse on the transfer to the third party, if and to the extent that the transfer is taxable, as if the nontransferring spouse had first received a gift of the property from the transferring spouse. Q&A-9 says nothing about affording similar treatment to any proceeds which are received by a transferring spouse from a third party pursuant to the property transfer. While it is true that Q&A-9 recognizes that some transfers of property by a spouse to a third party may qualify for nonrecognition treatment under section 1041, Q&A-9 requires that the transfers must be “on behalf of” the transferor’s spouse. The majority essentially takes the position that Ms. Read’s transfer of stock to MMP was on Mr. Read’s behalf because, the majority concludes, the redemption benefited him. We disagree. In this case, Ms. Read’s transfer of stock to MMP was on her own behalf since it allowed her to cash out her interest in MMP at its appreciated value (and it allowed her to do so, under the majority’s view, without any tax implications to her). The critical fact is that Mr. Read had no obligation to MMP that was satisfied by Ms. Read’s transfer of her stock to MMP. Thus, although Ms. Read may have transferred her stock to MMP at the direction of Mr. Read, we do not believe that she did so “on behalf of” him. In Blatt, we held that the redemption of Ms. Blatt’s stock pursuant to a divorce decree was not on behalf of Mr. Blatt because Ms. Blatt failed to prove the redemption satisfied an obligation of his. See Blatt v. Commissioner, 102 T.C. at 81-82. We set forth an example on the top of page 81, wherein we stated that Q&A — 9 operates when “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.” We stated that the redemption in Blatt was outside of Q&A-9 because “The redemption, in form, was a transaction between petitioner [Ms. Blatt] and corporation; she transferred her stock to corporation in exchange for its appreciated value in cash. * * * A transfer that satisfies an obligation or a liability of someone is a transfer on behalf of that person”. Id. The only reported opinion in which this Court has decided whether a corporate redemption incident to a divorce qualified for nonrecognition treatment under section 1041 is Blatt. There, as mentioned above, we held that the redemption did not qualify under Q&A-9. We recognized that the Court of Appeals for the Ninth Circuit had afforded nonrecognition treatment to a spouse who had transferred her shares to a corporation pursuant to a divorce, see Arnes v. United States, 981 F.2d 456 (9th Cir. 1992), but we stated that we disagreed with the opinion of the Court of Appeals for the Ninth Circuit. We stated in Blatt that “any putative benefit to [Mr.] Blatt [the nontransferring spouse], such as relief from a possible claim under marital property distribution laws, does not mean that the transfer by petitioner [Ms. Blatt] of her shares to corporation was on behalf of [Mr.] Blatt.” Blatt v. Commissioner, 102 T.C. at 83. But for the Court of Appeals for the Ninth Circuit, we are unaware of any Court of Appeals that has addressed the issue of whether a corporate redemption qualifies under Q&A-9. We conclude with a final concern about the analysis set forth in the majority opinion. Congress enacted section 1041, in part, to remedy the “whipsaw” that occurred when one spouse failed to report his or her gain on the transfer of appreciated property to the other spouse; the Government was whipsawed because the transferee’s basis in the transferred property equaled its fair market value, and the trans-feror, to the extent that the section 6501 period of limitations had closed, never paid any Federal income tax on the appreciated value underlying that increased basis. See id. at 79. Although the majority avoids this “whipsaw” in the instant cases by concluding that Mr. Read conceded he was liable for Federal income tax on the redemption, we do not agree that Mr. Read’s position in this case was a concession of liability or should be treated as one. Mr. Read’s position was based on a legal analysis that the majority rejects. Mr. Read should not be held to that position after the legal principles on which his position was based are turned aside by the majority, particularly since the tax result to Mr. Read may change as a result of their analysis. But for his “concession”, the majority would have had to analyze the tax effect of the redemption on Mr. Read. Q&A-9 states that the nontransferring spouse is taxed on the third party transfer; it does not specify when this tax arises. If, in fact, section 1041 applies to the redemption, as the majority concludes, then, under general income tax principles, Mr. Read is treated as receiving a dividend which arguably is taxable to him in 1986, the year of the redemption, rather than in the years in issue as held by the majority. See secs. 301(a), (b)(1), (c), and (d) and 302(d). See generally Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 8.23 (1999 Cum. Supp. I).2 Thus, under this argument, Mr. Read’s dividend is taxable to him in a year that most likely is closed by the section 6501 period of limitations. Under the majority’s analysis, therefore, the Government may be faced once again with the very same “whipsaw” that Congress intended to remedy through the enactment of section 1041. Although the majority sidesteps this issue in this case by holding that Mr. Read conceded his tax liability as to the subject payments, that “concession” only applies to the subject years. We see no judicial or equitable reason why Mr. Read will be precluded from arguing in the future that the payments which he receives on the promissory note in other years (with the exception of 1986) are not taxable to him in those years because they were properly taxable to him in 1986, the year of the redemption. Thornton, J., agrees with this dissent.   We use the term “spouse” to include both a spouse and a former spouse.    We note that the installment method of sec. 453 does not apply to the receipt of a distribution taxed as a dividend under sec. 301. The installment method may be used only to report “income” from a “disposition of property”, sec. 453(a) and (b)(1), and a “distribution of property” under sec. 302(d) does not meet that requirement, see Cox v. Commissioner, 78 T.C. 1021 (1982). See generally Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, “Distributions of Corporation’s Own Obligations”, par. 8.23 at 8-83 to 8-84 (1999 Cum. Supp. 1).