Bell v. Commissioner, 700 F. App'x 654

In 2008, MBA Real Estate, Inc. (newly formed) bought REO contracts from J. Michael Bell’s sole proprietorship for $225,000, payable $10,000/month at 10% interest.
The Bells received a contractual right to receive $225,000 from MBA; MBA had no meaningful assets or operating history aside from the REO contracts.
No promissory note, security, or evidence of third‑party financing existed; MBA was thinly capitalized and the REO contracts were speculative.
The Tax Court characterized the transaction under 26 U.S.C. § 351(a) (transfer solely in exchange for stock) rather than § 351(b) (receipt of other property or money).
Key legal question turned on whether the contractual right to payment should be treated as stock or indebtedness under 26 U.S.C. § 385 and common‑law factors.
The court of appeals affirmed the Tax Court, applying the Ninth Circuit’s 11‑factor Hardman test and distinguishing Gyro Engineering.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether the contractual right to $225,000 issued by MBA is "stock" (so §351(a) applies) or "other property/money" (so §351(b) applies)	Bells: The parties created a contractual right to payment (not stock), so §351(b) should govern	Government/IRS: Under §385 and common‑law factors, the contractual right should be treated as stock for tax purposes	Court: The contractual right is properly characterized as stock under §385; §351(a) governs

Hardman v. United States, 827 F.2d 1409 (9th Cir. 1987) (adopted an 11‑factor test to characterize interests as stock or debt)
Gyro Engineering Corp. v. United States, 417 F.2d 437 (9th Cir. 1969) (contrasted facts where negotiable notes and self‑liquidating, income‑producing assets supported characterization as debt)