450 F.2d 472 | 5th Cir. | 1972
Lead Opinion
In this hotly contested suit for refund of Federal income taxes an ingenious taxpayer and a skeptical tax collector vigorously dispute the legal characterization of an imaginative financial maneuver. If the elaborate multi-stage transaction in question amounted to no more than a “sale or exchange” of a partnership interest under § 741
Like most sophisticated schemes for minimizing taxes, the plan was an intricate one. It originated in 1962 while Taxpayer (Mrs. Frances Wood Wilson) was the owner of an undivided
(i) Taxpayer withdrew completely from the partnership in exchange for an undivided
(ii) Acting individually and as executrix of her husband’s estate, Taxpayer then exchanged her interest in the Pine Forest Apartments for other real property (the Oglethorpe Shopping Center) belonging to the estate.
(iii) Acting solely in her capacity as executrix, Taxpayer transferred the estate’s interest in the Pine Forest Apartments for $200,000 cash to the Blairs' newly erected closely held corporation (the Blair Investment Company).
(iv) Finally, the Blair Investment Company transferred its
The critical significance of step (iv) grows out of the two parallel assertions implicit in the Government’s theory of the case. First, as has long been recognized, the substance rather than the form of a transaction determines its tax consequences, particularly if the form is merely a convenient device for accomplishing indirectly what could not have been achieved by the selection of a more straightforward route.
A corollary proposition, equally well established, is that the tax consequences of an interrelated series of transactions are not to be determined by viewing each of them in isolation but by considering them together as component parts of an overall plan. Scroll, Inc. v. Commissioner of Internal Revenue, 5 Cir., 1971, 447 F.2d 612; Waterman S.S. Corp. v. Commissioner of Internal
Here the successful application of these principles depends upon a showing by the Government that, while in form these transfers may appear to be no more than a liquidation of a partnership interest followed by a tax-free § 1031 exchange,
Obviously what happened here was not equivalent to a sale unless the final step (iv) was consummated — that is, unless Mrs. Wilson’s undivided
Moreover, the fact of the eventual transfer of the corporation’s undivided interest in the Pine Forest Apartments back into the partnership is of crucial evidentiary significance in the final analysis of whether the essence of
What does, instead, make the transaction in question a sale is the fact that while theoretically a matter of indifference to Taxpayer, consummation of the step (iv) was practically essential to its success, since without it there might have been no deal. Mr. Blair wanted Taxpayer’s partnership interest, and to get it he was willing to go along with a suggested alternative plan which he thought amounted to practically the same thing as a direct sale (see note 5, swpra). The key was to keep Pine Forest Apartments in the partnership. From the partnership’s standpoint, this goal would have been frustrated by transferring (and keeping) s%2b of it in the separate corporate entity, a result which might have brought about substantial tax disadvantages. From Taxpayer’s standpoint, she needed (or desired) income-producing properties which she could not get from the partnership in a liquidating distribution. To acquire such property (Oglethorpe Shopping Center) she needed cash to pay the seller.
Our conclusion is not affected by the undisputed fact that Taxpayer disposed of her entire partnership interest rather than a portion of it. The steps with which we are concerned are those that lead inevitably to a result in every respect equivalent to a taxable sale, even though individually any one step may have the technical form of a § 736 liquidation. A step transaction is not magically transformed into something else merely because one of the critical steps was not further subdivided into a piecemeal disposition of the partnership interest, and it makes no difference that interest whatever. The entire transaction on paper may have been flawless, following the initial transfer involved in step (i) Taxpayer ostensibly retained no but it was nevertheless a sale after all was said and done.
Nor do we overlook Taxpayer’s clearly correct contention that Congress, in enacting these provisions, has provided an individual with alternative methods for divesting himself of a partnership interest. • See Foxman v. Commissioner of Internal Revenue, 3 Cir., 1965, 352 F.2d 466; Paul J. Kelly, 1970, 29 T.C.M. 1090; Andrew O. Stilwell, 1966, 46 T.C. 247. Taxpayers have a choice between selling and liquidating. But they cannot compel a court to characterize the transaction solely upon the basis of a concentration on one facet of it when the totality of circumstances determines its tax status. The most obvious answer to Taxpayer’s argument that the parties’ characterization is conclusive is that such a result would completely thwart the Congressional policy
The judgment of the District Court is reversed and the cause remanded for entry of judgment in favor of the United States.
Reversed and remanded.
. “RECOGNITION AND CHARACTER OP GAIN OR LOSS ON SALE OR EXCHANGE.
In the case of a sale or exchange of an interest in a partnership, gain or loss shall be recognized to the transferor partner.
. “PAYMENTS TO A RETIRING PARTNER OR A DECEASED PARTNER’S SUCCESSOR IN INTEREST.
* * * * *
(b) Payments for Interest In Partnership.—
(1) General rule. — Payments made in liquidation of the interest of a retiring partner or a deceased partner shall, to the extent such payments (other than payments described in paragraph (2)) are determined, under regulations prescribed by the Secretary or his delegate, to be made in exchange for the interest of such partner in partnership property, be considered as a distribution by the partnership and not as a distributive share or guaranteed payment under subsection (a).” 26 U.S. O.A. § 736(b).
Section 761(d) defines “liquidation of a partner’s interest” as “the termination of a partner’s entire interest in a partnership by means of a distribution, or a series of distributions, to the partner by the partnership.”
. In its order granting Taxpayer’s motion for summary judgment the District Court stated that all steps took place on November 30, 1962. However, there is no evidence in the record establishing either the existence or timing of the fourth step, and the only reference to it is in the , deposition of Mr. Blair’s accountant, who stated that he was not present at the closing on November 30, that he did not know whether all the transactions took place on the same day, but that he “assumed” they did. This led to our post-argument request that the parties stipulate the missing facts regarding this step.
. Commissioner of Internal Revenue v. Tower, 1946, 327 U.S. 280, 288-289, 66 S.Ct. 532, 536-537, 90 L.Ed. 670, 676-677; Helvering v. Clifford, 1940, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788; Higgins v. Smith, 1939, 308 U.S. 473, 476-477, 60 S.Ct. 355, 357-358, 84 L.Ed. 406, 410; Griffiths v. Helvering, 1939, 308 U.S. 355, 357-358, 60 S.Ct. 277, 278-279, 84 L.Ed. 319, 322; Minnesota Tea Co. v. Helvering, 1938, 302 U.S. 609, 613-614, 58 S.Ct. 393, 394-395, 82 L.Ed. 474, 477; Gregory v. Helvering, 1935, 293 U.S. 465, 470, 55 S.Ct. 266, 268, 79 L.Ed. 596, 599.
. In arguing that the technical form of the transaction must prevail here, Taxpayer has not once suggested any conceivable legitimate business purpose that might have dictated the utilization of such a convoluted sequence of preplanned paper exchanges in place of a direct sale for cash. See Knetseh v. United States, 1960, 364 U.S. 361, 81 S.Ct. 132, 5 L.Ed.2d 128. Indeed, Mr. Blair told the Board of Directors of the Blair Investment Corporation that the entire elaborate arrangement was “in net effect the same as his proposal.” Mr. Blair’s view of the transaction coincides with our own — in every respect' except its form it was a sale of the part
. As an alternative ground for reversal the Government argues that the District Court improperly held Taxpayer’s exchange of her interest in the apartments for the shopping center to be entitled to the nonrecognition of gain or loss treatment afforded by § 1031, since the apartment property was encumbered by substantial liabilities from which Taxpayer had been relieved. However, since this contention was never presented to the District Court, we do not consider it now.
. It is just a coincidence that she was both the willing buyer and the willing seller.
. “A given result at the end of a straight path is not made a different result because reached by following a devious path.” Minnesota Tea Co., supra, 302 U.S. at 613, 58 S.Ct. at 394, 82 L.Ed. at 477.
Rehearing
ON PETITION FOR REHEARING AND PETITION FOR REHEARING EN BANC
The Petition for Rehearing is denied and no member of this panel nor Judge in regular active service on the Court having requested that the Court be polled on rehearing en banc, (Rule 35 Federal Rules of Appellate Procedure; Local Fifth Circuit Rule 12) the Petition for Rehearing En Banc is denied.