Court Opinion

ID: 73567
Source: CourtListenerOpinion
Date Created: 2010-04-26 08:11:51+00
Date Added: 2024-06-11T12:05:13.729274
License: Public Domain

PUBLISH

               IN THE UNITED STATES COURT OF APPEALS
                      FOR THE ELEVENTH CIRCUIT

                          -------------------------------------------
                                                                               FILED
                                                                       U.S. COURT OF APPEALS
                                       No. 98-8298                       ELEVENTH CIRCUIT
                                                                              03/05/99
                          --------------------------------------------    THOMAS K. KAHN
                                                                               CLERK
                              D. C. Docket No. 24341-95

ROBERT R. PLANTE and MARY B. PLANTE,

                                                            Petitioners-Appellants,

     versus

COMMISSIONER OF INTERNAL REVENUE,

                                                            Respondent-Appellee.

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                           Appeal from the Decision of the
                             United States Tax Court

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                                     (March 5, 1999)

Before EDMONDSON and BLACK, Circuit Judges, and RESTANI*, Judge.

_______________

*    Honorable Jane A. Restani, Judge, U.S. Court of International Trade, sitting
     by designation.
PER CURIAM:

     Taxpayers, Robert Plante and Mary Plante, appeal the tax

court’s decision that they are not entitled to a business bad-debt

deduction for 1991 and the associated carryover losses to later

years. We see no reversible error and affirm.

                          BACKGROUND

     In 1987, Robert Plante (Plante) purchased a marina. He

then transferred all of the marina’s assets to Boating Center

of Baltimore, Inc. (BCBI): Plante was president and sole

shareholder of BCBI. Then, Plante transferred a total of

                                2
$320,000 to BCBI, evidenced by promissory notes. Over the

next four years, Plante advanced another $155,000 to BCBI.

These advances were not recorded as promissory notes.

     BCBI suffered heavy losses; so, Plante decided to sell the

business. Preliminary negotiations with a buyer resulted in a

selling price of $1,050,000. At closing, on 20 December 1991, the

buyer learned about the $475,000 in advances Plante made to

BCBI: advances reflected in BCBI’s books as a liability to

Plante. When the buyer insisted that liability from BCBI to

Plante be eliminated, the parties, in Maryland, added this

provision to the Stock Purchase Agreement:

                                  3
     The shareholder, as the sole Shareholder and as

President of the Corporation, hereby makes the

following representations . . .

          Shareholder has transferred Four

     Hundred Seventy-Five Thousand ($475,000.00)

     Dollars of notes and accrued interest of the

     Corporation due Shareholder as of 11/1/91 to

     the equity account of the Corporation and

     has made this an irrevocable capital

     contribution to the Corporation. The notes,

     accrued interest and capital lease due
                            4
          Shareholder as of the Closing have been

          tendered to Buyer in exchange for Buyer

          notes.

     In this appeal, Plante asks us to treat the $475,000 as a

bad debt, instead of a capital contribution because this

treatment would allow him to pay less tax. The Tax Court,

however, treated the $475,000 as a capital contribution and

ordered Plante to pay the IRS $8,849.

                          DISCUSSION
                                5
      We must determine whether the $475,000 Plante advanced to

BCBI was a loan or a capital contribution. We usually apply a 13-

factor test to make this determination.            See Lane v. United

States, 742 F.2d 1311, 1314-15 (11th Cir. 1984).

      After “[t]aking into account the [thirteen] factors,” the Tax

Court decided that the $155,000 not evidenced by promissory notes

was not deductible. The Tax Court reasoned that Plante failed to

carry his burden of proof on his claimed deduction because Plante

provided “virtually no information regarding $155,000 of the

amount here in dispute[.]”

                                       6
      We do not need to decide today, however, if the Tax Court

correctly applied the 13-factor test to the sum not tied to

                  1
promissory notes. The Tax Court’s decision -- based on a different

theory -- about the $320,000 evidenced by promissory notes that

Plante advanced to BCBI applies with equal force to the full

  1
   Two considerations make us hesitant to review the Tax
Court’s application of this test. First, the Tax Court did not
provide a written explanation for its application of the
factors. Second, the Tax Court did not make explicit findings on
the corporate books, interest payments, and testimony of
Plante suggesting that the advances, at a time before the sale,
were loans.
                                 7
                                       2
amount ($475,000) claimed by Plante        and provides sufficient

grounds to affirm the Tax Court’s decision.

      When a taxpayer characterizes a transaction in a certain

form, the Commissioner may bind the taxpayer to that form for

tax purposes. See Bradley v. United States, 730 F.2d 718, 720 (11th

Cir. 1984).   This is the rule: “[a] party can challenge the tax

consequences of his agreement as construed by the Commissioner

only by adducing proof which in an action between the parties

would be admissible to alter that construction or to show its

unenforceability because of mistake, undue influence, fraud, duress,

  2
   Before the Tax Court, “[n]either party ma[de] a distinction
between the portion of the $475,000 in unpaid advances
represented by notes and the remaining portion.”
                                 8
           3
et cetera.” Id. This rule is named the Danielson rule after a case

in which the rule was applied. See Commissioner v. Danielson, 378

F.2d 771, 775 (3d Cir. 1967).

      The Tax Court invoked the Danielson rule when it said that the

Stock Purchase “[A]greement clearly makes the disposition of the

notes part of the sale transaction and characterizes their

  3
   In his brief, Plante asserts that he “went along with the
changes [to the Stock Purchase Agreement] because he was under
duress.” Plante, however abandoned a true duress claim during
oral argument by saying: “First of all, the taxpayer here does
not assert that . . . there was any duress or overreaching in the
transaction with the buyer.” Even when we consider what
Plante has called a duress argument, we must reject it as
meritless: general economic hardship is not “duress” for legal
purposes. See Lee v. Flightsafety Servs. Corp., 20 F.3d 428, 432
(11th Cir. 1994); Blumenthal v. Heron, 274 A.2d 636, 640-41 (Md. 1971).
                                   9
disposition as a contribution to BCBI’s capital.” We agree with

the Tax Court that Plante characterized his advances to BCBI as

capital contributions and may not now obtain the tax benefits

of treating the advances as loans to BCBI.

     The Stock Purchase Agreement is unambiguous: “[Plante] has

transferred . . . $475,000.00 . . . of notes and accrued interest of

the Corporation due [Plante] as of 11/1/91 to the equity account of the

Corporation and has made this an irrevocable capital

contribution[.]” (emphasis added). This sentence characterizes

Plante’s advances as a capital contribution.

     Plante, however, makes two arguments attempting to avoid

the Danielson rule.      First, he says that the Stock Purchase
                                  10
Agreement is ambiguous in characterizing his advances as

capital contributions and that, therefore, we must use evidence

extrinsic to the Agreement to decide if the advances were capital

contributions or loans.     He says the Agreement is ambiguous

because the second sentence of the Agreement conflicts with the

first sentence. If the debt were transferred to equity on 11/1/91,

according to Plante, then Plante could not own the notes he

purported to transfer on 12/20/91.

     We disagree. We do not think the first sentence means that

the advances were made to equity on 11/1/91. We think “as of 11/1/91”

is the date for calculating BCBI’s liability, not the date of the

capital transfer because “as of 11/1/91” immediately follows “due
                                 11
             4
[Plante].”       And, if “as of 11/1/91” meant the transfer took place on

1 November, the Agreement would probably be written “on 11/1/91.”

Also, if the advances were transferred to equity on 1 November,

as Plante contends, then the buyer would not have been concerned

about BCBI’s potential liability to Plante on 12/20/91. So, the

advances were made into capital contributions on 20 December

1991.

   4
    This reading is consistent with a stipulation agreed to by
Plante and the IRS: “As of November 1, 1991, the petitioner had
unpaid advances to the corporation totaling $475,000.00.”
Also, the preamble to the stipulation
makes clear that the IRS did not agree
that use of the word “advance” means
“loans for federal income tax purposes.”
                                      12
      Regardless of whether the advances were debts at one time,

the   advances    were   characterized     at   closing   as   capital

contributions. Tendering the “notes, accrued interest and capital

lease” to the buyer -- the words of the second sentence of the Stock

Purchase Agreement -- was a way to implement the buyer’s and

seller’s plan to extinguish potential debts of BCBI to Plante. No

inconsistency or ambiguity, therefore, exists in the pertinent

provision. Having made his decision to treat the advances to

BCBI as capital contributions to close the million-dollar deal,

Plante cannot now look for recoupment from the IRS.

      Plante’s second argument to avoid the Danielson rule is that

the Danielson rule should not apply in this case. He notes, correctly,
                                  13
that one purpose of the Danielson rule is to prevent the IRS from

being “whipsawed”: litigating against two parties, like Plante and

BCBI, to collect tax from only one party. Plante asserts BCBI was

insolvent. Then, he argues that the Danielson rule does not apply

if the corporation was insolvent before and after the notes were

canceled because “cancellation of the debt will not result in a

taxable income to BCBI.” No danger of “whipsaw” exists, therefore,

says Plante.

     The record is not plain that BCBI was insolvent before and

after the sale.   In any event, the Danielson rule has other

purposes, however, that are applicable to this case. “If a party

could alter the express terms of his contract by arguing that the
                                14
terms did not represent economic reality, the Commissioner would

be required to litigate the underlying factual circumstances of

‘countless’ agreements.” North Am. Rayon Corp. v. Commissioner,

12 F.3d 583, 587 (6th Cir. 1993). Also, business agreements are often

structured with an eye toward the tax consequences of the

             5
agreement.       Allowing one party to realize a better tax

consequence than the consequence for which it bargained is to

grant “a unilateral reformation” of the agreement, which

  5
   The Stock Purchase Agreement was negotiated with an eye to
the tax consequences. According to Plante’s brief: “The terms of
the Stock Purchase Agreement were dictated by [the buyer] to
gain tax and other advantages.”
                                 15
                                                                     6
considerably undermines the certainty of business deals.

Danielson, 378 F.2d at 775.

      Plante raises a number of other arguments in Sections A, E,

and F of his brief, as well as arguments about other

interpretations    of   the   Danielson   rule,   about   alternate

constructions of the Stock Purchase Agreement, and about

extrinsic evidence. We have considered these arguments, but we

                                     7
cannot agree with the arguments.

  6
   We think these reasons for the Danielson rule also refute
Plante’s arguments based on Comdisco, Inc. v. United States, 756
F.2d 569 (7th Cir. 1985) (investment-tax-credit case).

  7
   We are unpersuaded by Plante’s arguments based on Giblin v.
Commissioner, 227 F.2d 692 (5th Cir. 1955). Giblin is
distinguishable from this case because Giblin’s debt cancellation,
                                16
     We conclude that Plante’s advances were a capital

contribution and, therefore, Plante was not entitled to a business

bad-debt deduction and associated carryover losses.

     We AFFIRM.

apparently, was not specifically characterized as a capital
contribution and because it was clear from the Giblin record --
as it is not clear here -- that the corporation was insolvent
before and after the cancellation. We are more persuaded by
Lidgerwood Mfg. Co. v. Commissioner, 229 F.2d 241 (2d Cir. 1956).
Also, Giblin pre-dates our adoption of the Danielson rule. See
Spector v. Commissioner, 641 F.2d 376 (5th Cir. 1981).
                                 17