Hellawell, E. Robert

English

Case Western Reserve University School of Law

Case Western Reserve Law ReviewVolume 12 | Issue 21961Advance Planning for Capital Gain--GenerallyMaking the Disposition a Sale or ExchangeE. Robert HellawellFollow this and additional works at: https://scholarlycommons.law.case.edu/caselrevPart of the Law CommonsThis Symposium is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law ScholarlyCommons. It has been accepted for inclusion in Case Western Reserve Law Review by an authorized administrator of Case Western Reserve UniversitySchool of Law Scholarly Commons.Recommended CitationE. Robert Hellawell, Advance Planning for Capital Gain--Generally Making the Disposition a Sale or Exchange, 12 W. Res. L. Rev. 271(1961)Available at: https://scholarlycommons.law.case.edu/caselrev/vol12/iss2/20TAX CLINIC ON CAPITAL GAINSVADVANCE PLANNING FOR CAPITAL GAIN - GENERALLYMAKING THE DISPOSITION A SALE OR EXCHANGEE. Robert HellawellNo matter how long an asset has been held, and regardless of thefact that it is a capital asset, long term capital gain will not result fromits disposition unless that disposition qualifies as a sale or exchange.'The payment of a debt obligation is a common example of a dispositionwhich fails to qualify. Although the retirement of certain obligations istreated as an exchange under the express provisions of section 1232 (a)-(1).2 many obligations, including all those in which the obligor is anindividual, do not come within the terms of that section. Accordingly,the holder of such a debt obligation with a basis less than its face amountincurs ordinary income upon payment of the obligation at maturity.Ordinary income may be avoided in this situation, however, by a sale ofthe obligation prior to maturity. The few cases in this area have beenliberal in allowing the creation of sales or exchanges by a taxpayer facedwith an imminent disposition which would not qualify as a sale or ex-change.'As in all instances where a taxpayer seeks to avoid ordinary incomeby creating a capital gain transaction, caution is required. The cases havedearly stated that a tax-avoidance motivation alone will not destroy theintended capital gain result, but the sale must be bona fide.As a first requirement, of course, the transaction must not fall withinthe anticipation or assignment of income principles.4Second, the sale must have reality. The cases in the area have notgone deeply into this point; under the circumstances present in each case,the courts were able to conclude that the sale was real. However, a fewsuggestions may be offered. The property together with the benefits and,if any, the burdens of its ownership should actually be transferred to thethird party. Following the sale, any gain or loss on the later disposition1. See INT. REv. CODE OF 1954, § 1222(3). Certain dispositions, by special statutory pro-visions, are treated as sales or exchanges. See, e.g., §§ 1231 (a), 1232(a) (1).2. See discussion pp. 351-52.3. Commissioner v. Phillips, 275 F.2d 33 (4th Cir. 1960) (dictum), reversing 30 T.C. 866(1958); Arnfeld v. United States, 163 F. Supp. 865 (Ct. Cl. 1958) (dictum), cert. denied,359 U.S. 943 (1959); Paine v. Commissioner, 236 F.2d 398 (8th Cit. 1956), reversing 23T.C. 391 (1954); Conrad N. Hilton, 13 T.C. 623 (1949); Stanley D. Beard, 4 T.C. 756(1945), acq., 1944-1 CuM. BULL. 13; W. P. Hobby, 2 T.C. 980 (1943); Clara M. TullyTrust, 1 T.C. 611 (1943); Rose M. Everett, 4 CCH Tax Ct. Mem. 454 (1945).4. See discussion p. 265. As to discount obligations, see discussion pp. 351-59.1961]WESTERN RESERVE LAW REVIEWmust fall to the purchaser. In the debt situation, for instance, the sellershould not guarantee the buyer against loss in the event the obligation isnot paid in full at maturity. The purchaser should not be restricted inhis use of the asset or in the manner of its disposition.'Third, there should be, if possible, a substantial time interval betweenthe sale and any later non-qualifying disposition. Where possible, too,the later disposition should not be certain of occurrence at the time ofthe sale or exchange.' Great latitude has been afforded by the courtson this point, upholding sales where a later disposition was virtually cer-tain to occur in only two or three days' time.7 But it is safer to avoidsuch circumstances.Fourth, the sale should be to a third person completely unrelated tothe taxpayer. The cases have provided some latitude here. Sales havebeen upheld when made to friends and business associates,' incuding lawpartners,9 under circumstances indicating that the purchaser entered intothe transaction simply as an accommodation to the seller.'" But wherepossible this should be avoided. This is not an area where sharp linescan be drawn which a taxpayer can skirt with safety. All of the circum-stances of the transaction will come under the court's scrutiny, and evena slight weakness in any of them may have some effect in determiningthe result.The courts have shown a greater liberality toward the taxpayer's at-tempts to engineer a sale or exchange than in most areas of tax law. Thestep transaction doctrine, in particular, has not been applied with rigor.This is perhaps due to the technical nature of the sale or exchange re-quirement itself. That requirement in most circumstances has little rela-tion to the reasons for allowing long term capital gain treatment Ac-cordingly the courts seem willing to accept a technical compliance withit.1i5. See Leona Kurth Moore, 5 CCH Tax Ct. Mem. 133 (1946) (disregarding a "sale" ofstock when the purchaser was under a binding commitment to sell to the issuing corporationwithin a few months after the "sale" occurred).6. Ibid.7. Arnfeld v. United States, 163 F. Supp. 865 (Ct. Cl. 1958) (dictum), cert. denied, 359U.S. 943 (1959); John D. McKee, 35 B.T.A. 239 (1937), acq., 1937-1 CuM. BULL. 10.8. W. P. Hobby, 2 T.C. 980 (1943).9. Commissioner v. Phillips, 275 F.2d 33 (4th Cir. 1960) (dictum).10. Arnfeld v. United States, 163 F. Supp. 865 (Ct. Cl. 1958) (dictum), cert. denied, 359U.S. 943 (1959); W. P. Hobby, 2 T.C. 980 (1943).11. Where the sale is designed to do more than simply meet the requirement of a sale orexchange the courts have usually been less lenient. E.g., Commissioner v. P. G. Lake, Inc.,356 U.S. 260 (1958). But see Zenz v. Quinliven, 213 F.2d 914 (6th Cir. 1954), reversing706 F. Supp. 57 (N.D. Ohio 1952); Chamberlain v. Commissioner, 207 F.2d 462 (6th Cir.1953), reversing 18 T.C. 164 (1952).[Mach

Advance Planning for Capital Gain--Generally Making the Disposition a Sale or Exchange

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Advance Planning for Capital Gain--Generally Making the Disposition a Sale or Exchange

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