Stewart v. Nebraska Dept. of Rev., 294 Neb. 1010

Background

Brenton R. Stewart and Mary M. Stewart (Nebraska residents) sold their Pioneer Aerial Applicators, Inc. stock to Aurora Cooperative; the closing date (and relevant date under the statute) was March 1, 2010.
To qualify Pioneer as a "qualified corporation" (required for a lifetime special capital gains election), Mary sold one share each to three officers of the buyer on February 26, 2010, creating at least five shareholders.
The Stewarts made the Nebraska special capital gains election on the March 1 sale but did not elect it for Mary’s February 26 transfers (Mary paid tax on those sales).
Nebraska Department of Revenue disallowed the Stewarts’ election, finding Pioneer was not a qualified corporation at the time of the March 1 sale and applying federal common-law economic substance and sham-transaction doctrines to disregard the February 26 transfers.
The Tax Commissioner and the district court upheld the disallowance; the Nebraska Supreme Court granted bypass review.

Issues

Issue	Stewart's Argument	Department's Argument	Held
Whether the economic substance/sham-transaction doctrines can be applied to deny the state special capital gains election	The statutes’ plain language controls; qualification is determined at the time of the first sale (March 1), so February 26 transfers are effective and outside inquiry	Judicial doctrines permit disregarding pre-sale steps made solely to qualify for tax benefits; courts may look to substance over form to effectuate tax statutes	Court held statutes unambiguous; could not read-in economic substance or sham doctrines; Pioneer met statutory shareholder requirements at March 1, so election stands
Whether events preceding the first sale may be examined to determine qualified-corporation status	Preceding transactions not within the statutory scope; Legislature set a single time point for qualification	Pre-sale steps are relevant to determine whether the alleged shareholders were bona fide and whether the statute should be interpreted in substance	Court held the statute focuses on shareholders "at the time of the first sale or exchange"; preceding events are outside the statute’s scope
Whether the Legislature’s omission of economic-substance language implies intent to exclude those doctrines	Omission indicates the Legislature did not intend to impose additional requirements	Longstanding federal doctrines are implicit and should be applied to prevent tax avoidance	Court inferred legislative intent from omission and presumed Legislature knew federal doctrines; therefore it would have included them if intended—declined to apply doctrines
Whether prior state decisions justify applying federal tax doctrines to add requirements to clear statutes	Prior cases refused to add requirements to unambiguous statutes; therefore plain language must control	Cited Mid City Bank as precedent where federal doctrine was used to harmonize statutes	Court distinguished Mid City Bank; found no statutory conflict or ambiguity here and reaffirmed refusal to add words to clear statutes

Key Cases Cited

Valpak of Omaha v. Nebraska Dept. of Rev., 290 Neb. 497, 861 N.W.2d 105 (recognition of standard for judicial review of agency action)
Kerford Limestone Co. v. Nebraska Dept. of Rev., 287 Neb. 653, 844 N.W.2d 276 (court refused to add requirements not in statute)
Cargill Meat Solutions v. Colfax Cty. Bd. of Equal., 290 Neb. 726, 861 N.W.2d 718 (court rejected reading extra words into clear statute)
Bridgeport Ethanol v. Nebraska Dept. of Rev., 284 Neb. 291, 818 N.W.2d 600 (statutory-interpretation principles cited)
Mid City Bank v. Douglas Cty. Bd. of Equal., 260 Neb. 282, 616 N.W.2d 341 (distinguished: federal doctrine used there to harmonize conflicting statutes, not applicable here)