- 17 -
by the McDonald's franchise agreement to terminate their joint
ownership of Moriah.
Joann and John Arnes entered into an agreement to have
Moriah redeem Joann's 50-percent interest for $450,000. Joann
reported the gain from the redemption on her Federal income tax
return. Subsequently, Joann filed a claim for refund, contending
that the transfer of her stock to Moriah was made pursuant to a
divorce instrument, and therefore she was not required to
recognize any gain on the transfer of her stock in accordance
with section 1041. The Internal Revenue Service (IRS) disallowed
the claim for refund, and Joann filed suit in District Court.
The District Court concluded that the redemption was
required by a divorce instrument, and that John had benefited
from the transaction because it was part of the marital property
settlement, which limited future community property claims by
Joann. The court, applying Q&A 9, determined that, although
Joann transferred her stock directly to Moriah, the transfer was
made on behalf of John and should be treated as having been made
to John. Accordingly, the transfer qualified for nonrecognition
of gain pursuant to section 1041 and summary judgment was granted
in favor of Joann. Id.
The Court of Appeals for the Ninth Circuit affirmed the
judgment of the District Court. The Court of Appeals observed
that the transfer would be tax free to Joann pursuant to section
1041 if the transfer were “on behalf of” John as required by Q&A
9. The court reasoned that a transfer is “on behalf of” another
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011