Arnes v. United States
United States Court of Appeals for the Ninth Circuit
981 F.2d 456 (1992)
Facts
Joann Arnes (Joann) (plaintiff) and John Arnes (John), her husband, formed a corporation, Moriah, to operate a McDonald’s franchise. Joann and John jointly held 5,000 shares of Moriah stock. Eventually, Joann and John agreed to divorce. McDonald’s required 100 percent ownership of equity by the owner-operator of each franchise, so Joann and John agreed to effectively transfer Joann’s 50 percent interest in outstanding Moriah stock to John through a corporate redemption of Joann’s 2,500 shares of stock. Joann was compensated for the redemption through a mix of loan forgiveness on money she owed Moriah and cash payments. On Joann’s subsequent tax return after the stock redemption, Joann reported a profit from the sale of her stock. Afterward, Joann filed a claim for a refund based on the fact she was not required to recognize a gain on the sale of her stock because it was an exempt transfer made pursuant to a divorce agreement under Internal Revenue Code (I.R.C.) § 1041 and Temporary Treasury Regulation § 1.1041-1T. The Internal Revenue Service (IRS) (defendant) rejected the claim for a refund. Joann filed suit in district court, and the district court granted summary judgment in Joann’s favor, finding that the exemption to I.R.C. § 1041 applied. The IRS appealed to the United States Court of Appeals for the Ninth Circuit.
Rule of Law
Issue
Holding and Reasoning (Hug, J.)
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