Relying on Arnes II, the taxpayers argued the transaction was tax-free under section 1041 and that the legal standard to apply was the primary and unconditional obligation standard established by the constructive dividend decisional law.
Much of the confusion surrounding third-party transfers stems from the meaning of the phrase "on behalf of." In Arnes, the district court ruled that the transfer was on the husband's behalf if it relieved him of an obligation.
* IN ARNES I AND ARNES II, THE GOVERNMENT WAS "whipsawed" and collected no tax when spouses transferred appreciated property to a corporation without any tax consequences.
The holding in Arnes appears to be consistent with Temp.
Nonetheless, in the absence of a successful challenge to the validity of the temporary regulations, tax practitioners are forced to live with the result in Arnes. The court's decision makes it clear that Joann is not taxable on the proceeds received on redemption.
The regulation cited in Arnes, when read literally, indicates that "the transfer of property will be treated as made directly to the nontransferring spouse (or former spouse) and the nontransferring spouse will be treated as immediately transferring the property to the third party." (Emphasis added.) A further issue is whether this third party must be unrelated, or do the rules applicable to attribution dividends under Sec.
The Hayes case, like Arnes I, involved a McDonald's franchise.
Blatt relied on Arnes I in asserting that the redemption should be tax-free to her under section 1041.