Internal Revenue Case Study

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Carol M. Read, et al. v. Commissioner of Internal Revenue

Facts

Ms. Read and Mr. Read were previously married and filed a petition of the dissolution of their marriage. They jointly owned 100% of Mulberry Motor Parts, Inc., a corporation that sold automobile parts. Pursuant to this filing, Ms. Read owned 1,200 shares of voting stock and 12,000 shares of nonvoting stock. Mr. Read owned 1,300 shares of voting stock and 13,000 shares of nonvoting stock.

In the marital settlement agreement, it was decided that Ms. Read would give all of her stock in Mulberry Motor Parts, Inc. Either Mr. Read or Mulberry Motor Parts, Inc., on Mr. Read’s behalf, would purchase the said stock at the appraised value of $838,724. In addition to this transaction, …show more content…
Read elected for Mulberry Motor Parts, Inc. and Ms. Read to enter into a stock purchase agreement in which, through written consent, Mulberry Motor Parts, Inc. redeemed all of Ms. Read’s stock for the corporation, an amount of $834,724. This payment was in three parts: a down payment of $200,000, an installment promissory note for $638,724, and a collateralized security of nonvoting capital stock.

After the divorce, Mr. Read officially owned 100% of the outstanding voting common stock of Mulberry Motor Parts, Inc. The only income reported by Ms. Read on her tax returns were the interest payments from the promissory note, denoted as interest income. …show more content…
Transfer to a third party is after the written request of the spouse.

3. Transferor (Ms. Read) receives from former spouse (Mr. Read) written consent or ratification of third party transfer.

If these any of these situations apply, the transaction qualifies for non-recognition of gain under Section 1041. - Mr. Read and Mulberry Motor Parts, Inc.’s position that Section 1041 does not apply to the transfer was rejected because the primary-and-unconditional-obligation standard was not found to be appropriate. In this case, Ms. Read was transferring property to a third party (Mulberry Motor Parts, Inc.) on behalf of Mr. Read. - Additionally, Ms. Read’s transfer did not qualify as a liability or obligation of Mr. Read. This qualification nullifies a former case brought by the petitioners of Mr. Read and Mulberry Motor Parts, Inc.

- The phrase “on behalf of” was a widely argued issue that concluded that Ms. Read was Mr. Read’s representative in the case of the third party transfer. It was found and decided that Ms. Read, in making the transfer of property to Mulberry Motor Parts, Inc., was acting in the interest of Mr.
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