Hayes v. Comm'r of Internal Revenue

Decision Date29 December 1993
Docket NumberNos. 26913–91,30646–91.,s. 26913–91
Citation101 T.C. No. 40,101 T.C. 593
PartiesMary Ruth HAYES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Jimmy L. HAYES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
CourtU.S. Tax Court


Mary Ruth Hayes, pro se in docket No. 26913–91.

Kevin C. Johnson, Cincinnati, OH, for petitioner in docket No. 30646–91.

Katherine Lee Wambsqans, Cleveland, OH, for respondent.CHIECHI, Judge:

Respondent determined the following deficiencies in Federal income tax with respect to petitioner Jimmy L. Hayes (Mr. Hayes) and petitioner Mary Ruth Hayes (Ms. Hayes):

                ¦Petitioner     ¦Year  ¦Deficiency  ¦
                ¦Jimmy L. Hayes ¦1986  ¦$56,527     ¦
                ¦               ¦1987  ¦5,390       ¦
                ¦Mary Ruth Hayes¦1986  ¦18,608      ¦
                ¦               ¦1987  ¦3,925       ¦


Some of the facts have been stipulated and are so found. At the time their respective petitions were filed, Mr. Hayes and Ms. Hayes resided at separate addresses in Shaker Heights, Ohio.

Mr. Hayes and Ms. Hayes married in 1953. Divorce proceedings to end their marriage were pending during 1986. At the time of their divorce in 1986, Mr. Hayes and Ms. Hayes were sole shareholders in JRE, Inc. (JRE), a corporation which operated a franchise from McDonald's Corporation (McDonald's). Mr. Hayes held a majority of the stock of JRE, while Ms. Hayes held the remainder. Because of the pending divorce of Mr. Hayes and Ms. Hayes, McDonald's required Ms. Hayes to dispose of her stock interest in JRE in order for Mr. Hayes to retain the franchise.

On April 2, 1986, Mr. Hayes and Ms. Hayes executed a separation agreement (the separation agreement) in the presence of their respective counsel, which obligated Mr. Hayes to purchase Ms. Hayes' stock in JRE for $128,000. Mr. Hayes was to pay $100,000 of the total purchase price within 30 days of the date of the separation agreement and two additional installments of $14,000 each on September 30, 1986, and March 31, 1987.

The separation agreement further provided that it could be modified only in writing and that it would be incorporated into any final divorce decree entered by a court with respect to the couple. The separation agreement also stated that, notwithstanding any such incorporation, it

shall not be deemed to have merged into any final decree or order entered into by any court, but rather shall remain an enforceable agreement by and/or against the parties, and the terms hereof shall survive independent of any such decree or order.

On April 4, 1986, Mr. Hayes' attorney, Joseph H. Blackwell, wrote a letter (the Blackwell letter) to Ms. Hayes' counsel, Harvey Snider. The Blackwell letter indicated that Mr. Hayes did not have the money to consummate his purchase of Ms. Hayes' stock in JRE that was required by the terms of the separation agreement. Mr. Hayes did not have the money to pay for that stock because of his poor cash management practices. The Blackwell letter also stated that Mr. Hayes would incur a large Federal income tax liability if he were to withdraw money from JRE in order to effectuate that acquisition. The Blackwell letter then proposed that JRE redeem 1 Ms. Hayes' stock, since Ms. Hayes' tax on such a redemption would be lower than the tax Mr. Hayes would have to pay were JRE to distribute a dividend which he would use to purchase her stock.

On May 27, 1986, Donald M. Boehm, Mr. Hayes' and JRE's accountant, wrote a letter to Mr. Hayes' former counsel in which he recommended that JRE, rather than Mr. Hayes, purchase Ms. Hayes' stock in JRE.

At or subsequent to the time the separation agreement was executed, the referee hearing the divorce case became impatient with its progress and threatened to dismiss it if Mr. Hayes and Ms. Hayes could not reach agreement on all outstanding issues relating to their divorce.

On June 4, 1986, the Court of Common Pleas for Cuyahoga County (Court of Common Pleas) entered a judgment in the Hayes' divorce proceeding (the original judgment), which granted Ms. Hayes a divorce, incorporated the separation agreement into its judgment, and ordered that agreement into full force and effect.

Also on June 4, 1986, Ms. Hayes and JRE executed an agreement (the redemption agreement) under which JRE agreed to redeem her stock for $128,000. The redemption agreement stated that Ms. Hayes had decided to retire for reasons of health and that JRE's board had voted unanimously (with Ms. Hayes' abstaining) to purchase her stock. The redemption agreement also stated that JRE had sufficient surplus to effect the redemption. Pursuant to that agreement, JRE was obligated to deliver a check for $128,000 to Ms. Hayes upon surrender of her stock. Ms. Hayes received from JRE a check in the amount of $114,000 on December 31, 1986, and a check for $14,000 on March 31, 1987.

The redemption agreement made no reference to the separation agreement or to the pending divorce action. Nor was the separation agreement modified in connection with the execution of the redemption agreement.

On March 3, 1987, an order was entered by the Court of Common Pleas in the Hayes' divorce case, which stated that it was correcting the original judgment nunc pro tunc (the nunc pro tunc order). The nunc pro tunc order provided that the terms of the original judgment, which required Mr. Hayes to buy Ms. Hayes' stock of JRE, were changed to provide that Ms. Hayes agreed to transfer to JRE, and JRE agreed to redeem from Ms. Hayes, her JRE stock. Although the terms of payment under the nunc pro tunc order were the same as originally provided for in the separation agreement, the first payment by JRE was not made in the amount or at the time specified by the nunc pro tunc order, while the second payment was.

Neither Mr. Hayes nor Ms. Hayes reported any income from the redemption of Ms. Hayes' JRE stock on their separate 1986 and 1987 Federal income tax returns. Respondent issued a separate notice of deficiency to each of them in connection with that redemption. In the notice of deficiency issued to Mr. Hayes, respondent determined that the redemption of Ms. Hayes' stock in JRE resulted in a constructive dividend to him. In the notice of deficiency issued to Ms. Hayes, respondent determined that Ms. Hayes realized a long-term capital gain from the redemption of her stock in JRE.


Each petitioner bears the burden of demonstrating error in the respective determinations made by respondent. Rule 142(a). Respondent has informed the Court that the determinations made against Mr. Hayes and Ms. Hayes are alternative determinations. Thus, respondent concedes that if one of the petitioners is held liable for tax in connection with the redemption of Ms. Hayes' stock in JRE, the other petitioner will not be liable for any such tax.

Although respondent's role in these two cases is that of a stakeholder, she nonetheless argues that the tax incurred as a result of the redemption of Ms. Hayes' stock in JRE should be borne by Mr. Hayes because JRE's redemption was made on his behalf and therefore constituted a constructive dividend to him. If we were to accept respondent's argument, Ms. Hayes would be shielded by section 1041 2 from recognizing gain on the redemption. That section provides nonrecognition treatment for a transfer of property between spouses or former spouses where the transfer is incident to a divorce. Q & A 9 of section 1.1041–1T(c), Temporary Income Tax Regs., 49 Fed.Reg. 34,453 (Aug. 31, 1984), confirms this result as to Ms. Hayes if we were to adopt respondent's position. There, it is provided that, where one spouse transfers property to a third party on behalf of the other spouse, the transfer is treated as if the transferring spouse transfers the property to the nontransferring spouse, who then transfers it to the third party. Consequently, under respondent's position, Ms. Hayes would be treated as if she had transferred her stock in JRE to Mr. Hayes, who then transferred it to JRE. 3

Respondent claims that JRE's redemption of Ms. Hayes' stock constituted a constructive dividend to Mr. Hayes because the separation agreement created an obligation in Mr. Hayes, and not JRE, to purchase Ms. Hayes' stock and that that obligation was validly incorporated into the original judgment of divorce. Respondent argues that the nunc pro tunc order should not be given effect for tax purposes because it did not represent the intention of the parties at the time the original judgment was entered, but rather effected a change in the obligations imposed by that judgment.

Ms. Hayes contends that, in substance, the redemption of her JRE stock was a transfer of such stock by her to Mr. Hayes, who in turn transferred it to JRE. Ms. Hayes argues that therefore section 1041 shields her from recognition of gain on that redemption.

Mr. Hayes contends that the provision in the original judgment obligating him to purchase Ms. Hayes' stock in JRE was erroneous and that the nunc pro tunc order retroactively corrected it. He argues that the judgment as corrected by the nunc pro tunc order obligated JRE, and not him, to purchase Ms. Hayes' stock and that therefore JRE's redemption of the stock did not result in a constructive dividend to him.

Whether a corporation has satisfied a shareholder's obligation, thus giving rise to a constructive dividend, is a question of fact. Jacobs v. Commissioner, 698 F.2d 850, 852 (6th Cir.1983), affg. per curiam T.C.Memo. 1981–81; Priester v. Commissioner, 38 T.C. 316, 324–325 (1962).

It is well settled that a shareholder receives a constructive dividend to the extent of available earnings and profits when a corporation redeems stock which that shareholder has a primary and unconditional obligation to purchase. 4 Sullivan v....

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4 cases
  • Read v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • 4 Febrero 2000
    ...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 WL 540802 (1993), Arnes v. Commissioner, 102 T.C. 522, 1994 WL 110824 (1994), and Blatt v. Commissioner, 102 T.C. 77, 1994 WL 26306 (199......
  • Arnes v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • 5 Abril 1994
    ...a constructive dividend results to the remaining shareholder. Wall v. United States, 164 F.2d 462 (4th Cir.1947); Hayes v. Commissioner, 101 T.C. 593 (December 29, 1993); Edler v. Commissioner, T.C.Memo. 1982–67, affd. 727 F.2d 857 (9th Cir.1984). However, this rule is limited to those circ......
  • McDonald v. Commissioner
    • United States
    • U.S. Tax Court
    • 12 Diciembre 1994
    ...nunc pro tunc order which retroactively applies to correct a mistake will be recognized for Federal tax purposes. Hayes v. Commissioner [Dec. 49,514], 101 T.C. 593 (1993); Gordon v. Commissioner [Dec. 35,257], 70 T.C. 525, 530 (1978); Newman v. Commissioner [Dec. 34,495], 68 T.C. 494, 501 (......
  • Blatt v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • 31 Enero 1994
    ...spouse under section 1041 and, under the authorities cited above, dividend treatment of the remaining spouse. See Hayes v. Commissioner, 101 T.C. 593, 597, 602 n. 9, 605 n. 11 (1993) (slip op. at 9–10, 15 n. 9, and 20 n. 11 and cases cited therein). If, as in the case at hand, this conditio......
1 books & journal articles
  • Divorce issues and business succession planning.
    • United States
    • The Tax Adviser Vol. 35 No. 12, December 2004
    • 1 Diciembre 2004
    ...1969-2 CB 42; William Sullivan, 363 F2d 724 (8th Cir. 1966), cert. den.; William Wall, 164 F2d 462 (4th Cir. 1947); and Mary Ruth Hayes, 101 TC 593 (8) See TD 9035 (1/14/03). (9) See the preamble to TD 9035, id. (10) IRS Letter Ruling 9230021 (4/28/93). Evelyn M. Capassakis, J.D., LL.M. Wea......

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