¶1dissenting: I disagree with the standards that the majority opinion uses for determining whether Ms. Read’s transfer of stock to MMP qualifies as a transfer to which section 1041 applies.
¶2When considering whether section 1041 can be applied to a transfer to a third party, it is necessary to examine the tax consequences for both spouses. This is because symmetrical treatment of both spouses is necessary to achieve the purposes of section 1041. The transaction in issue in this case is Ms. Read’s transfer of stock to MMP. This transaction was a corporate redemption that left Mr. Read in control of MMP. A substantial body of case law has developed regarding the tax results of such redemptions.
¶3Long before the enactment of section 1041, courts were required to deal with the tax ramifications of a corporate redemption of one shareholder’s stock that left a remaining shareholder in control of the redeeming corporation. From one perspective, such a redemption conferred a control benefit on the remaining shareholder. Based on this, the Commissioner argued that the corporation’s redemption payment constituted a constructive dividend to the remaining shareholder. On the other hand, the postredemption value of the corporation was diminished by the distribution of corporate funds used in the redemption, suggesting that the remaining shareholder may have received no real benefit from the redemption. From this latter perspective, the redemption simply reflects a shareholder’s sale of stock to the corporation. Given these considerations, courts have consistently held that a corporate distribution to redeem one shareholder’s stock could be treated as a corporate dividend to the remaining shareholder only if the redemption transaction satisfied the remaining shareholder’s primary and unconditional personal obligation to purchase the stock. See Arnes v. Commissioner, 102 T.C. 522, 527 (1994) (Arnes II); Edler v. Commissioner, T.C. Memo. 1982-67, affd. 727 F.2d 857 (9th Cir. 1984). As we explained in Edler.
The issue is whether the stock redemption resulted in a constructive dividend to petitioner. We are faced with the rule that where a corporation redeems stock which its remaining shareholder was obligated to buy, the remaining shareholder receives a constructive dividend. Wall v. United States, 164 F.2d 462 (4th Cir. 1947). However, the rule of Wall has been limited to those circumstances where the obligation of the purchasing shareholder is both primary and unconditional. Enoch v. Commissioner, 57 T.C. 781 (1972); Priester v. Commissioner, 38 T.C. 316 (1962). If, on the other hand, the corporation redeems stock which the remaining shareholder was not obligated to buy, no constructive dividend is received by that shareholder. Edenfield v. Commissioner, 19 T.C. 13 (1952).
Applying the above rules, certain disparate tax consequences become apparent. When two shareholders own a corporation, there is no practical economic difference between using a stock redemption and using a dividend distribution to the remaining shareholder to fund the acquisition of the selling shareholder’s stock. Nevertheless, the tax consequences to the remaining shareholder are profoundly different. A knowledgeable shareholder could negotiate a dedemption by the corporation and escape harsh tax consequences to himself; whereas, a less knowledgeable shareholder might unwilling commit himself to effect the purchase and be threatened with an unintended dividend. Except for the tax consequences, the shareholder’s economic positions are identical. Obviously, in this area of the tax law, the form employed is critical and taxpayers are free to choose the form most beneficial to themselves. It is against this background that the rule of Wall has been limited to circumstances where the obligation which has been discharged is both primary and unconditional.
[Fn. refs, omitted.]
¶4If a redemption satisfied a primary and unconditional obligation of the remaining shareholder, the remaining shareholder was generally treated as having received a constructive dividend. See Hayes v. Commissioner, 101 T.C. 593, 599 (1993). While the primary and unconditional standard is often referred to as determinative of whether a redemption of one shareholder’s stock is a constructive dividend to the remaining shareholder, this is an oversimplification. The standard really determines only whether a redemption of one shareholder’s stock should be treated as a corporate distribution to the remaining shareholder.
¶5The primary and unconditional standard is applicable to stock redemptions required by divorce judgments. For example in Edler v. Commissioner, supra, a divorce settlement and judgment required a redemption of the wife’s corporate shares, leaving the husband in control of the corporation. This Court and the Court of Appeals for the Ninth Circuit found that the redemption required by the “modified” settlement and judgment did not relieve the husband of a primary and unconditional obligation to purchase his wife’s stock, and as a result, the husband did not receive a constructive dividend. In Edler, the “original” settlement and judgment required the husband to pay his wife for her stock interest. The Court of Appeals for the Ninth Circuit noted that had the “original” divorce settlement and judgment remained in effect, the corporation’s redemption payment to the wife would have satisfied the husband’s obligation and would have been treated as a dividend to the husband. See Edler v. Commissioner, 727 F.2d at 860.
¶6Court opinions dealing with taxable years prior to the enactment of section 1041 generally do not discuss the tax treatment of the stockholder whose stock was being redeemed. This was because there was no question that the person whose stock was being redeemed would be taxable on any gain on the sale of his or her stock, regardless of who paid for the stock or whether the remaining shareholder was treated as having received a dividend. The enactment of section 1041 introduced a broad rule of nonrecognition for transfers of property between spouses and former spouses incident to divorce. Section 1041 makes no reference to transfers to third parties. However, temporary regulations issued under section 1041 explain the circumstances in which a spouse’s transfer to a third party qualifies as a transfer to which section 1041 applies. See sec. 1.1041-lT(c), Q&A-9, Temporary Income Tax Regs. (Q&A-9), 49 Fed. Reg. 34453 (Aug. 31, 1984).
¶7Q&A-9 does not specifically address a spouse’s transfer of stock to the issuing corporation as part of a corporate redemption that was required by a divorce judgment. However, in this case and prior cases, the Commissioner has consistently treated Q&A-9 as applying to divorce-related corporate redemptions, and this position has been adopted by the Court of Appeals for the Ninth Circuit in Arnes v. United States, 981 F.2d 456 (9th Cir. 1992). See also Hayes v. Commissioner, supra, and Craven v. United States, 83 AFTR 2d 99—1268, 99-1 USTC par. 50,336 (N.D. Ga. 1999), in which Q&A-9 was applied to divorce-related redemptions of stock.
¶8One of the purposes for enacting section 1041 was to prevent divorcing spouses from whipsawing the Commissioner by taking inconsistent positions on divorce-related transfers. In Blatt v. Commissioner, 102 T.C. 77, 79 (1994), we explained:
In part, Congress enacted section 1041 to replace the holding in United States v. Davis, 370 U.S. 65 (1962), that a divorce-related transfer of property in exchange for the release of marital claims resulted in recognition of gain to the transferor. H. Rept. 98-432, at 1491-1492 (1984). Before the enactment of section 1041, as a result of Davis, the transferring former spouse was taxable on a divorce-related transfer of appreciated property to his or her former spouse, and the recipient received a basis in the transferred property equal to its fair market value on the date of transfer. United States v. Davis, supra. Thus, the Government was whipsawed if such a transferor did not report any gain on a transfer of appreciated property. Accordingly, in 1984, Congress enacted section 1041 to remedy this whipsaw. H. Rept. 98-432, at 1491-1492 (1984). [Fn. ref. omitted.]
¶9Q&A-9 specifies the way a transaction will be treated for both spouses and requires symmetrical results as to those spouses in order to prevent a whipsaw. Under Q&A-9, if a spouse’s transfer to a third party qualifies for nonrecognition under section 1041, then she is treated as if she transferred the property to the other spouse (nontransferring spouse). Section 1041(b)(2) provides that the nontransferring spouse’s basis in the property is the same as the transferring spouse’s basis. The nontransferring spouse is then treated as having transferred the property to the third party. Thus if Q&A-9 applies to this case, Ms. Read will be treated as having transferred her stock to Mr. Read, and Mr. Read’s basis in the transferred stock will be the same as Ms. Read’s — zero. Mr. Read will then be treated as having transferred the stock to MMP. It follows that the redemption proceeds should be treated as having been received by Mr. Read who in turn is treated as having paid Ms. Read.
¶10Pursuant to Q&A-9, a transfer of property to a third party required by a divorce or separation instrument will be treated as qualified under section 1041 only if it is made “on behalf of” the nontransferring spouse. In order to accomplish this regulatory scheme and the statutory goal of eliminating whipsaws, the phrase “on behalf of” must have the same meaning when applied to each of the divorcing spouses.
¶11There is nothing in Q&A-9 to indicate that the Commissioner was attempting to, or could, change the existing standards for determining whether a corporate redemption of one shareholder’s stock could be treated as a distribution to the remaining shareholder. Indeed, Q&A-9 is a temporary regulation intended only to effect the legislative objective of section 1041. Nothing in section 1041, or its legislative history, suggests that it was intended to displace longstanding principles used in determining whether a corporate redemption of one shareholder’s stock could be treated as a distribution to the remaining shareholder. In Arnes II, we specifically held that the enactment of section 1041 did not change the primary and unconditional standard for determining whether a redemption of one spouse’s stock can result in a constructive dividend to the other spouse. In Arnes II, 102 T.C. at 528, we stated: “The rationale of Edler [the primary and unconditional test] was not affected by the enactment of section 1041, and the case is still the law of the Court of Appeals for the Ninth Circuit, to which this case is appeal-able.”
¶12Respondent’s position is that Mr. Read had a primary and unconditional obligation to purchase Ms. Read’s stock and that the redemption of Ms. Read’s stock (a necessary and integral part of which was her transfer of stock to MMP) satisfied Mr. Read’s obligation. Mr. Read, MMP, and Ms. Read agree that the primary and unconditional obligation standard should be determinative of whether Ms. Read’s transfer of stock was “on behalf of” Mr. Read within the meaning of Q&A-9. On this point, the parties are all correct.
¶13Arnes II was decided for a tax year to which Q&A-9 was applicable. Indeed, the Court of Appeals for the Ninth Circuit had applied Q&A-9 to Mrs. Arnes, giving her the nonrecognition benefit of section 1041. See Arnes v. United States, 981 F.2d 456 (9th Cir. 1992).
¶14The majority now holds that the “on behalf of” requirement in Q&A-9 is satisfied by a standard that is substantially lower and less precise than the primary and unconditional obligation test of Edler v. Commissioner, T.C. Memo. 1982-67, and Arnes II. The majority holds that the “on behalf of” test is satisfied if the transfer was “in the interest of” or was made by the transferring spouse acting “as a representative. of” the nontransferring spouse. This standard presumably could be met if the nontransferring spouse received some general benefit or if the obligation of the non-transferring spouse was either secondary, conditional, or both. Based on this lower standard, the majority holds that Ms. Read is entitled to rely on section 1041 and, therefore, need not recognize gain on the transfer of her stock.
¶15One of the problems with simply applying the dictionary meaning of “on behalf of” to a divorce-related corporate redemption is that the redemption will usually, in a general sense, be in the interest of both the spouse whose stock is redeemed- and the spouse who is the remaining shareholder. For example, the transferring spouse receives money from the corporation in return for her stock. This receipt of money (especially if it represents a substantial gain as in this case) benefits the transferring spouse. Oftentimes the transfer will also generally benefit the spouse who is the remaining shareholder. This is the same dilemma that courts confronted in trying to determine whether a redemption of one shareholder’s stock could ever be considered a constructive dividend to the remaining shareholder. As a result, the courts fashioned the primary and unconditional obligation test that we applied in Arnes II. The fact that Ms. Read’s transfer was simply “in the interest of” Mr. Read or. that Mr. Read received “some general benefit” is an insufficient reason for us to conclude that Mr. Read could have a constructive dividend. See Ingham v. United States, 167 F.3d 1240 (9th Cir. 1999), where the court explained that a transfer to a third party would not be considered “on behalf of” the other spouse within the meaning of Q&A-9 unless the transfer relieved the other spouse of a “specific legal obligation or liability.” Id. at 1244. The fact that the other spouse receives “some general benefit” is insufficient. Id.
¶16Because Q&A-9 controls the tax treatment of both spouses, a divorce-related corporate redemption transaction should not be considered to be a transfer “on behalf of” the non-transferring spouse within the meaning of Q&A-9 unless the nontransferring spouse had a primary and unconditional obligation to purchase the redeemed stock.
¶17The majority’s error is compounded by concluding that Mr. Read must recognize a constructive dividend but failing to give any legal explanation for this result. How could Mr. Read have a constructive dividend in light of our prior Court-reviewed opinion in Arnes II, where we said that section 1041 made no change in prior law and held that a redemption of one spouse’s stock cannot result in a constructive dividend to the other stockholder spouse, unless the redemption satisfied the latter’s primary and unconditional personal obligation to purchase the redeemed shares? This is a problem that the majority refuses to confront. Instead, the majority simply states that Mr. Read and MMP “indicated” that if the Court were to find that section 1041 applies to Ms. Read, then respondent’s determinations regarding Mr. Read and MMP should be sustained. The majority’s attempt to extricate itself from this dilemma by latching onto an isolated statement in the motion filed by Mr. Read and MMP is unjustified by the record and fundamentally unfair.
¶18The “indication” by Mr. Read and MMP is taken out of context. The full argument made by Mr. Read and MMP is that Q&A-9 cannot apply to a corporate redemption unless the redemption satisfies a primary and unconditional obligation of the nontransferring spouse. They “indicate” that if this standard is met and Q&A-9 applies, then respondent’s determinations should be sustained. To take the latter statement out of context after having rejected the argument on which it is predicated is totally unwarranted. In any event, we should never rely upon and apply a party’s statement of law that is contrary to a holding contained in a prior Court-reviewed opinion of this Court that is still binding precedent.
¶19The question we should ask and answer is whether mmp’s redemption of Ms. Read’s stock satisfied a primary and unconditional obligation of Mr. Read. If the answer is yes, we should hold that Q&A-9 applies, Mr. Read had a constructive dividend, and Ms. Read gets the benefit of section 1041. If Mr. Read did not have a primary and unconditional obligation to purchase Ms. Read’s stock, then we should hold that Q&A-9 does not apply, the redemption of Ms. Read’s stock did not result in a constructive dividend to Mr. Read, and Ms. Read’s transfer of stock to MMP should be treated as a simple redemption resulting in a taxable capital gain to Ms. Read.
¶20 The constructive “treatment” of the participants in a redemption that satisfied the primary and unconditional obligation of the remaining shareholder under pre-sec.-1041 case law would be the same as that prescribed in sec. 1.1041-1T(c), Q&A-9, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984); i.e., the transferring shareholder would be treated as transferring stock to the remaining shareholder who would be treated as transferring the stock to the redeeming corporation in return for the corporate distribution.
¶21 No one questions that MMP had earnings and profits in excess of the redemption payments. MMP’s income tax returns for the relevant years show unappropriated retained earnings in excess of $1 million.
¶22 It has been suggested that Q&A-9 can never apply to a corporate redemption. If this were true, a corporate redemption of one spouse’s stock that satisfied the other spouse’s primary and unconditional obligation to purchase that stock could result in both spouse’s being taxed on the redemption. Such a result is contrary to the objective of sec. 1041, the Commissioner’s position, and existing case law.
¶23 It has been suggested that Arnes II did not discuss the impact that sec. 1041 and Q&A-9 would have on the spouse who was the remaining shareholder. However, as indicated above, in Arnes II we held that enactment of sec. 1041 had no impact on the tax treatment of the spouse who was the remaining shareholder after a divorce-related redemption of the other spouse’s stock. This issue was clearly before the Court as shown by the various concurring and dissenting opinions in Arnes II.
¶24 It has also been suggested that the primary and unconditional standard has no applicability to sec. 1041 and Q&A-9 because the primary and unconditional standard focuses on the purpose served by the corporate distribution to redeem stock rather than the spouse’s transfer of stock to the corporation. However, a redemption distribution to a spouse that satisfies a primary and unconditional obligation of the other spouse is completely dependent on the transfer of stock to the redeeming corporation. If a redemption distribution that satisfies a primary and unconditional obligation of the nontransferring spouse is totally dependent on the transfer of stock being redeemed, then the transfer of stock to the redeeming corporation is an integral part of satisfying the primary and unconditional obligation of the nontransferring spouse.
¶25 Ms. Read and respondent argue that the redemption satisfied Mr. Read's primary and unconditional obligation, while Mr. Read and MMP argue that Mr. Read was never primarily and unconditionally obligated to purchase Ms. Read’s stock.
¶26 The Court of Appeals for the Ninth Circuit concluded that the obligation to purchase Mrs. Arnes’ stock was Mr. Arnes’ obligation, not the corporation’s. Thus, the Court of Appeals’ opinion is consistent with the primary and unconditional obligation standard.
¶27 It has also been suggested that sec. 1041 and Q&A — 9 apply to all divorce-related transactions that are made to divide a marital estate. This approach is more encompassing than the majority’s approach and is contrary to established precedent. See Ingham v. United States, 167 F.3d 1240 (9th Cir. 1999); Blatt v. Commissioner, 102 T.C. 77 (1994).
¶28 The majority does not purport to overrule or modify Arnes II.
¶29dissenting:
¶30I. Introduction
¶31On February 5, 1986, Ms. Read disposed of all of her shares of stock in Mulberry Motor Parts, Inc. (the shares and MMP, respectively), by transferring the shares to MMP (the transfer). In consideration thereof, MMP paid Ms. Read $200,000 and agreed to pay her an additional $638,724 in installments (with interest). Ms. Read’s adjusted basis in the shares was zero, and she realized a gain on the transfer. See sec. 1001(a). That gain must be recognized to her unless some nonrecognition provision applies. See sec. 1001(c). Ms. Read relies on section 1041(a) to avoid the recognition of gain. Section 1041(a) provides:
SEC. 1041(a). General Rule. — No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of)—
(1) a spouse, or
(2) a former spouse, but only if the transfer is incident to the divorce.[1 ]
¶32Ms. Read is an individual, and she claims that no gain is recognized to her since she transferred the shares (property) to her former spouse (Mr. Read) incident to their divorce. Mr. Read disagrees that the transfer was to him. Ms. Read and Mr. Read agree that the question of whether the transfer was to him should be answered by determining whether he had a primary and unconditional obligation to purchase the shares. The majority holds that such an inquiry is inappropriate. I disagree. I further disagree with what seems to me to be the majority’s evocation of the principles of Commissioner v. Court Holding Co., 324 U.S. 331 (1945), to determine whether Ms. Read sold the shares to Mr. Read.
¶33II. Bootstrap Acquisitions
¶34Mr. Read acquired virtually complete ownership of MMP without expending any of his own funds. He did so by arranging for MMP to redeem the shards. Such an acquisition, where the acquirer uses funds of the corporation to aid in his acquisition of control, is sometimes referred to as a “bootstrap acquisition”. A part owner of a corporation can use the corporation’s funds to acquire complete ownership of the corporation in one of two ways. One, he can arrange for the corporation to purchase the seller’s shares. Two, he can purchase the seller’s shares and cause the corporation to redeem those shares from him. There is no practical difference between those alternatives. In both cases, the seller receives the same amount, and the remaining owner (sometimes, the buyer) becomes the sole owner of the corporation, whose assets are reduced by the same amount. It is well settled, however, that the difference in form between those alternatives may result in different income tax consequences (at least for the buyer). As Professors Bittker and Lokken put it:
If the buyer purchased all of the seller’s stock and later recouped some of the cash outlay by causing the corporation to redeem part of the newly acquired stock, the redemption distribution would be a dividend to the extent of earnings and profits because, as a pro rata distribution, it could not meet the standards of §§302(b)(l), (2), or (3). The buyer, however, avoids dividend consequences where the redemption is from the seller unless the buyer makes the mistake of undertaking a personal obligation to purchase the shares before the corporation agrees to redeem them. [3 Bittker & Lokken, Federal Taxation of Income, Estates, & Gifts, par. 93.1.5, at 93-17 (2d ed. 1991).]
¶35Although the form of the acquisition may be tailored to suit the buyer’s tax status (a corporate buyer may prefer the dividend treatment that, given sufficient earnings and profits, generally would accompany the redemption of shares purchased from the seller), once it is tailored, the buyer is stuck with the chosen form. In an early leading case, Wall v. United States, 164 F.2d 462 (4th Cir. 1947), the taxpayer contracted to purchase stock from a co-shareholder, agreeing to make a cash downpayment and to deliver his notes for the remainder of the purchase price. The taxpayer made the downpayment and received the stock, which he transferred to two trustees, to be held by them as security for the notes. After paying the first note, he transferred his equity in the stock to the corporation and caused it to pay the remaining notes as they became due. The Court of Appeals for the Fourth Circuit had no difficulty in finding that the taxpayer’s transfer of his equity to the corporation in consideration of the corporation’s assumption of his liability was a redemption of the underlying stock and that the redemption and the payment of the remaining owner’s note that became due in the year in question were essentially equivalent to the distribution of a taxable dividend. See id.
¶36In a variation on Wall, in Sullivan v. United States, 363 F.2d 724 (8th Cir. 1966), the Court of Appeals for the Eighth Circuit held that, if a buyer is subject to an executory, primary, and unconditional obligation to purchase the shares of the seller but instead causes the corporation to purchase those shares, the purchase results in a constructive distribution to the buyer, because it discharges his obligation. In Sullivan, the Court of Appeals found that, after the transaction was complete, (1) the taxpayer’s personal obligation to purchase the stock had been discharged, (2) the taxpayer owned all of the outstanding shares of stock of the corporation, (3) the corporation’s assets were decreased by the amount paid to the seller for his stock, and (4) that stock was held by the corporation as treasury stock. See id. at 729. Although the Court of Appeals is not explicit on the point, it appears that it considered the taxpayer as having constructively received the stock from the seller, which stock the taxpayer then transferred to the corporation in consideration of the corporation’s constructive distribution to him in redemption of that stock. The Court of Appeals rejected the taxpayer’s argument that he had received a distribution in redemption of shares that was a distribution in full payment in exchange for the stock and not a redemption essentially equivalent to a dividend. See id. at 729-730.
¶37Thus, if a buyer wishes to accomplish a bootstrap acquisition, the buyer, once having put the Wall type format into legally enforceable form, cannot avoid the tax consequences of a redemption from him of the seller’s stock by having the corporation pay the seller directly. Nevertheless, if the corporation simply agrees to redeem the seller’s stock and pays for the stock in installments, over time, and the payments do not discharge any obligation of the remaining owner, the payments do not constitute constructive distributions to the remaining owner. See Edenfield v. ommissioner, 19 T.C. 13 (1952). That is true even if the remaining owner guarantees performance by the corporation, pledges his shares as security for the deferred payments, or agrees to buy the shares if the corporation defaults. See id.; Buchholz Mortuaries, Inc. v. Commissioner, T.C. Memo. 1990-269; Rev. Rul. 69-608, 1969-2 C.B. 43, 44 (Situation 5).
¶38The logic of the bootstrap acquisition cases leads to the conclusion that, where the buyer has already purchased the seller’s stock, as in Wall v. United States, supra, or has a primary and unconditional obligation to do so, as in Sullivan v. United States, supra, the transfer of that stock to the corporation is in satisfaction of the buyer’s obligation to surrender for redemption stock that, actually, in Wall, or constructively, in Sullivan, he had purchased from the seller. Any transfer by the seller directly to the corporation would, under that logic, be on behalf of the buyer. Contrariwise, if the remaining shareholder has not purchased the seller’s stock, and has no obligation to do so, as in Edenfield v. Commissioner, supra, the transfer to the corporation should not be viewed as on the remaining shareholder’s behalf. Since there is no practical difference between the Wall and Edenfield type formats, the choice of form by the parties to the transaction plays a dominant role in determining the income tax consequences that will follow, and the crucial distinction is whether the corporation satisfies a legal obligation of the remaining shareholder to purchase the redeemed stock. No matter how close a taxpayer comes to undertaking a legal obligation to purchase the redeemed stock, the Wall principle should not apply unless that obligation was in fact undertaken. Thus, in S.K. Ames, Inc. v. Commissioner, 46 B.T.A. 1020 (1942), we construed a contract to purchase stock that provided that the taxpayer would “purchase or cause to be purchased” the stock. We held that the promise to “purchase or cause to be purchased” provided several methods for satisfying the obligation created under the contract, and, therefore, the taxpayer incurred no absolute obligation to purchase the stock. See also Buchholz Mortuaries, Inc., v. Commissioner, supra (contract accorded taxpayers, “or their assigns” right to purchase stock; purchase by corporation (assignee) did not discharge personal and primary obligation of taxpayers); Bunney v. Commissioner, T.C. Memo. 1988-112 (similar). In Kobacker v. Commissioner, 37 T.C. 882 (1962), the taxpayer negotiated to buy all of the capital stock of a corporation. The purchase agreement contained the following paragraph:
Buyer … is to have the right to assign this Agreement to a corporation, thereby releasing Buyer therefrom, and substituting such Corporation in the place of Buyer under this Agreement, with the same force and effect as if this Agreement were originally made with such Corporation, provided that such Corporation shall, by writing, agree to be bound by all of the terms, covenants and conditions of this Agreement. [Id. at 885.]
¶39In Kobacker, we held that the taxpayer had assumed no personal obligation to purchase the stock under that contract. See id. at 896.
¶40The fact that a bootstrap acquisition is incident to a divorce has no bearing on whether the buyer (for convenience, husband) and seller (wife) are held to the form upon which they have agreed. If the husband’s obligation to purchase the wife’s shares is primary and unconditional, then he is in constructive receipt of those shares notwithstanding that, on his behalf, the wife has transferred them to the corporation. If the husband does not have a primary and unconditional obligation to purchase the wife’s shares, then he is not in constructive receipt of those shares, and the wife’s transfer of those shares to the corporation is not on his behalf. If, pursuant to section 1041(a), the wife gains a tax advantage from the form settled upon by the parties (or loses a tax advantage if she realizes a loss on the disposition of the shares), then so be it. The bootstrap acquisition rules are fairly well settled and give the parties the flexibility to negotiate a mutually acceptable format for the wife to dispose of her shares. Those rules are consistent with the construction of section 1041(a) set forth in section 1.1041-1T(c), Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984). I see no reason why the primary and unconditional analysis is inappropriate to an analysis of the tax consequences in this and similar cases.
¶41III. Facts at Hand
¶42By agreement incorporated into the divorce judgment, Ms. Read was obligated to sell the shares to Mr. Read or, at his election, MMP or the ESOP plan of mmp (the ESOP). Mr. Read, MMP or the ESOP, as the case would be, was obligated to purchase the shares. Payment for the shares was to be made in installments, with Ms. Read retaining a security interest in the shares. Mr. Read was to guarantee payment of the installments if he elected to have MMP or the ESOP make the payments. Subsequent to the divorce, Mr. Read elected to have MMP purchase the shares. Mr. Read, Ms. Read, and one other individual constituted the board of directors of MMP (the board). By unanimous written consent, the board consented to MMP’s purchase of the shares. Subsequently, Ms. Read and MMP entered into a stock purchase agreement, and, pursuant thereto, MMP acquired the shares from her.
¶43Since Mr. Read had the right to assign his obligation to purchase the shares, I do not believe that his obligation to purchase the shares was primary and unconditional. The facts here are similar to the facts in S.K. Ames, Inc. v. Commissioner, supra, Buchholz Mortuaries, Inc. v. Commissioner, supra, and Bunney v. Commissioner, supra. Therefore, I would find that the transfer was to MMP, and not to (or on behalf of) Mr. Read.
¶44The majority finds that the transfer did not satisfy any liability or obligation of Mr. Read’s. Nevertheless, the majority finds that Ms. Read was, in effect, acting as Mr. Read’s agent in transferring the shares to MMP. Majority op. pp. 36-37. Without citing any authority, the majority appears to be relying on the principles of Commissioner v. Court Holding Co., 324 U.S. 331 (1945), where a corporation was taxed on gain on a sale by shareholders of property distributed by the corporation because the corporation went so far toward the sale before the distribution that the sale was in substance made by the corporation.
¶45In Court Holding Co., the Supreme Court said:
The incidence of taxation depends upon the substance of a transaction. The tax consequences which arise from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress. [Id. at 334; fn. ref. omitted.]
¶46The majority appears to be applying Court Holding Co. principles to determine that, in substance, Ms. Read sold the shares to Mr. Read although, on his behalf, she transferred them to MMP. That is an inappropriate analysis in the bootstrap acquisition area, where there is no practical difference between the two ways of accomplishing the bootstrap acquisition and the only relevant distinction is form, which is manifest by legal rights and duties. See the discussion by professors Bittker and Lokken at 3 Bittker & Lokken, Federal Taxation of Income, Estates, & Gifts, par. 93.1.5, at 93-19 (2d ed. 1991).
¶47IV. Conclusion
¶48Since I believe that Ms. Read has failed to prove that the transfer was to Mr. Read, I would hold section 1041(a) inapplicable and hold that she recognized gain on the transfer. Mr. Read, of course, had no item of gross income on account of the transfer.
¶49 The term “incident to the divorce” is defined in sec. 1041(c), and that definition is not in issue here.