MMP Corporation: Case Study

Carol M. Read v. Commissioner

Fact:

Ms. Read and Mr. Read owned all of the stocks of MMP Corporation. Then they got divorced. The divorce judgment determined that Ms. Read shall sell and convey all her stocks of MMP to Mr. Read, or at Mr. Read’s election to MMP or the ESOP plan of MMP. In return, Mr. Read, or at his election MMP or the MMP’s ESOP plan shall pay a total amount of $838,724 with a $200,000 down payment in cash. In addition, Mr. Read shall deliver a $638,724 promissory note guaranteed by Mr. Read, with 9% interest payable monthly and $50,000 installment principle payment per year. As a result, Mr. Read elected MMP, instead of Mr. Read, to purchase Ms. Read’s all stocks of MMP, to pay $200,000 and to issue the promissory note of $638,724 bearing 9 percent interest to Ms. Read. And MMP authorized and agreed with the election and settled a stock repurchase agreement with Ms. Read.

Then MMP recorded the promissory note as a liability and deducted the interest payments that made to Ms. Read in its tax return. Ms. Read did not recognize any income regarding her transfer of MMP stock to MMP, but reported the interest payments as income in her tax returns. And Mr. Read did not recognize any income

And the illustration of a property transfer by a spouse to a third party that satisfies an obligation or a liability of the other spouse, which was indicated one type of transfer by a transferring spouse to a third party on behalf of a nontransferring spouse within the meaning of Q&A-9, did not implicate the primary-and-unconditional–obligation standard. So the primary-and- unconditional-obligation standard is not an appropriate standard to apply to determine whether a transfer of property by the transferring spouse to a third party on behalf of the nontransferring spouse within the meaning of