Read v. Comm'r of Internal Revenue, s. 19001–97

Decision Date04 February 2000
Docket Number19322–97,Nos. 19001–97,19328–97.,s. 19001–97
Citation114 T.C. 14,114 T.C. No. 2
PartiesCarol M. READ, et al.,† Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

LARO, J.

MARVEL, J.

Background: Taxpayers, former husband and wife and husband's corporation, petitioned for redetermination of deficiencies arising from redemption of wife's stock under final divorce judgment. Cross-motions were filed for partial summary judgment.

Holdings: The Tax Court, Chiechi, J., held that:

(1) primary-and-unconditional-obligation standard was not appropriate standard to apply in any case involving a corporate redemption in divorce setting to determine whether transfer of property by spouse to a third party was on behalf of nontransferring spouse, and

(2) wife's transfer of her stock to the corporation was a transfer “on behalf of” husband, such that no gain would be recognized by wife on the transfer.

Former-wife's motion granted.

Colvin, J., concurred in written opinion, in which Parr, Whalen, Foley, Vasquez, and Gale, JJ., joined.

Ruwe, J., dissented in written opinion, in which Beghe, J., joined.

Halpern, J., dissented in written opinion, in which Wells and Beghe, JJ., joined.

Beghe, J., dissented in written opinion.

Laro and Marvel, JJ., dissented in written opinion, in which Thornton, J., joined.

Judgment affirmed, 273 F.3d 1120.

Mark A. Brown, for petitioner in docket No. 19001–97.

Karen E. Lewis and D. Michael O'Leary, for petitioners in docket Nos. 19322–97 and 19328–97.

Robert W. Dillard, for respondent.

OPINION

CHIECHI, J.

W and H, who were married, owned all of the voting, and virtually all of the nonvoting, stock of X corporation (X). They divorced, and the final judgment dissolving their marriage (divorce judgment) ordered (1) that W sell and convey to H, or at H's election to X or X's ESOP plan, all of her X stock, (2) that H, or at H's election X or X's ESOP plan, pay a stated amount of cash to W simultaneously with the sale and conveyance of such stock, and (3) that as additional consideration H, or at H's election X or X's ESOP plan, deliver to W a promissory note bearing 9–percent interest for the balance of the purchase price of that stock. Pursuant to the divorce judgment, H elected (1) that the sale and conveyance of all of W's X stock be made to X, instead of to H, (2) that X, instead of H, pay the stated amount of cash to W simultaneously with that sale and conveyance, and (3) that X, instead of H, issue a promissory note to W bearing 9–percent interest for the balance of the purchase price. Thereafter, pursuant to H's election under the divorce judgment, W sold and transferred to X, instead of to H, all of the X stock that she owned.

Sec. 1041(a), I.R.C., provides that no gain or loss is to be recognized on a transfer of property by an individual to a spouse or a former spouse but only if the transfer to the former spouse is incident to the divorce. Sec. 1.1041–1T(c), Q & A–9, Temporary Income Tax Regs. (Q & A–9), 49 Fed.Reg. 34453 (Aug. 31, 1984), addresses a transfer of property by a spouse (transferring spouse) to a third party on behalf of a spouse or former spouse (nontransferring spouse). Provided that the other requirements of that temporary regulation and sec. 1041, I.R.C., are satisfied, Q & A–9 treats such a transfer as a transfer of property by the transferring spouse directly to the nontransferring spouse that qualifies for nonrecognition treatment under sec. 1041, I.R.C., and an immediate transfer of the property by the nontransferring spouse to the third party in a transaction that does not qualify for nonrecognition treatment under sec. 1041, I.R.C.

Petitioners argue that the legal standard that must be applied in order to determine whether W's transfer of her X stock to X was a transfer to a third party on behalf of H within the meaning of Q & A–9 is the primary-and-unconditional-obligation standard established by constructive-dividend decisional law. However, they disagree as to whether the primary-and-unconditional-obligation standard is satisfied as to Mr. Read in the instant cases.

1. Held: The primary-and-unconditional-obligation standard is not an appropriate standard to apply in order to determine whether W's transfer of her X stock to X was a transfer of property by W to a third party on behalf of H within the meaning of Q & A–9. Held, further, the primary-and-unconditional-obligation standard is not an appropriate standard to apply in any case involving a corporate redemption in a divorce setting in order to determine whether the transfer of property by the transferring spouse to a third party is on behalf of the nontransferring spouse within the meaning of Q & A–9.

2. Held, further, applying the common, ordinary meaning of the phrase “on behalf of” in Q & A–9, W's transfer of her X stock to X was a transfer of property by W to a third party on behalf of H within the meaning of that temporary regulation. Held, further, pursuant to sec. 1041(a), I.R.C., no gain shall be recognized by W as a result of that transfer.

These cases are before us on cross-motions for partial summary judgment filed by Carol M. Read (Ms. Read) and by William A. Read (Mr. Read) and Mulberry Motor Parts, Inc. (MMP).2 (We shall refer to the motion for partial summary judgment filed by Ms. Read as Ms. Read's motion, to the motion for partial summary judgment filed by Mr. Read and MMP as Mr. Read's and MMP's motion, and collectively to those two motions as the cross-motions for partial summary judgment.)

A partial summary adjudication may be made that does not dispose of all the issues in a case if, inter alia, it is shown that there is no genuine issue as to any material fact with respect to the question(s) on which partial summary adjudication is sought. See Rule 121(b).3 We are in agreement with the parties that there are no genuine issues of material fact and that the facts material to the Court's disposition of the cross-motions for partial summary judgment are set forth in those paragraphs of the stipulation of facts and those exhibits attached to that stipulation, which the Court made part of the record in these cases on November 5, 1998.

At the time they filed their respective petitions, Ms. Read resided in San Francisco, California, Mr. Read resided in Lakeland, Florida, and MMP's principal place of business was in Bartow, Florida.

In 1985, Ms. Read filed a petition for dissolution of her marriage to Mr. Read (marriage dissolution action) in the Circuit Court of the Tenth Judicial Circuit of the State of Florida, Polk County (Florida court). At the time she filed that petition, Ms. Read owned 1,200 shares of voting and 12,000 shares of nonvoting, and Mr. Read owned 1,300 shares of voting and 13,000 shares of nonvoting, common stock of MMP, a corporation engaged in the business of selling automobile parts.

During the trial in the marriage dissolution action, Ms. Read and Mr. Read reached an oral settlement agreement (marital settlement agreement) which was read into the record in that action on December 5, 1985. The marital settlement agreement provided in pertinent part:

Wife [Ms. Read] agrees to convey to husband [Mr. Read] all of her stock in Mulberry Motor Parts, both voting and non-voting. And for such stock, husband, or at his option, Mulberry Motor Parts or the Aesop [sic] plan of Mulberry Motor Parts agrees to purchase such stock at its appraised value of $838,724, such purchase to be closed within 60 days of this date and to be paid as follows:

First, $200,000 down to be paid in cash * * * the balance of $638,724 to be evidenced by promissory note, to be signed by the purchaser but if the purchaser is other than William A. Read, to be guaranteed by William A. Read, and bearing interest at the rate of nine percent, payable monthly, on the principal, due from time to time; and with the principal to be payable $50,000 after twelve months and $50,000 principal each year thereafter until the principal is paid in full, with the right of prepayment at any time without penalty, and such purchase to be secured by a security interest in the stock to be sold, but with husband retaining a full right so long as he is in compliance and not in default on such note, to control such stock and to vote it.

* * *

* * * Husband agrees to pay the wife as permanent periodic alimony the sum of $2,500 per month and continuing until the death of the wife, the death of the husband, the remarriage of wife or wife's cohabitation with another man to whom she is not related by blood or marriage on a continuing basis for 60 days or more. * * *

* * *

* * * Additionally provided, however, that such alimony shall increase in amount from $2,500 per month to $3,000 per month at such time as the final principal payment is made by husband on the stock purchase called for on the Mulberry Motor Parts stock.

* * *

* * * The temporary alimony in the amount of $6,000 * * * the December payment of which has already been made, will terminate and no longer be payable in the event that husband pays the down payment on the stock purchase or causes it to be paid by either Mulberry Motor Parts or the Aesop [sic] plan and pays the consideration for the conveyance of the house and the $100,000 lump sum alimony on or before December 31st, 1985.

However, if husband fails to do so in whole or in part, the $6,000 temporary alimony will continue for the month of January, subject to termination only upon the death of the wife.

* * *

* * * Additionally, as part of the temporary support agreement, but for consideration in addition furnished by the wife, husband has agreed to maintain in force insurance on his life with death benefits payable to wife in the amount of $150,000, and continuing for a period of time that was ascertainable but uncertain.

Parties agree that so long as William A. Read owes to his wife any amount of principal on the stock purchase of Mulberry Motor Parts, he will maintain that insurance in...

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