CITE AS:  Crenshaw v. United States, KTC 1971-45 (5th Cir. 1971)


UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT


EMORY K. CRENSHAW, as Executor of the ESTATE OF FRANCES WOOD WILSON,
  Deceased, Plaintiff-Appellee v. UNITED STATES, Defendant-Appellant.

Docket: 30798                                    Filed October 22, 1971


Appeal from the United States District Court for the Northern District of 
Georgia


OPINION

	Before: BROWN, Chief Judge, COLEMAN and CLARK, Circuit Judges.

	John R. BROWN, Chief Judge:

	In this hotly contested suit for refund of Federal income taxes an 
ingenious taxpayer and a skeptical tax collector vigorously dispute the 
legal characterization of an imaginative financial maneuver. If the 
elaborate multi-stage transaction in question amounted to no more than a 
"sale or exchange" of a partnership interest under section 741 <> of the Internal Revenue Code of 1954, the Commissioner properly 
assessed and collected a $47,128.92 deficiency. On the other hand, if it 
was merely a "liquidating distribution" of a partnership interest governed 
by section 736(b) <>, the District Court correctly granted 
Taxpayer's motion for summary judgment. Initially we encountered some 
difficulty with the facts because the Government, while relying upon the 
well-entrenched "step transaction" doctrine, failed to prove all the 
steps. Now, with that problem solved and the material facts undisputed, we 
reverse.

	Like most sophisticated schemes for minimizing taxes, the plan was an 
intricate one. It originated in 1962 while Taxpayer (Mrs. Frances Wood 
Wilson) was the owner of an undivided 50/225 interest in the Pine Forest 
Associates partnership, the remaining interests belonging to Mr. and Mrs. 
Leon Blair. Mr. Blair approached Taxpayer's attorney with an offer to 
purchase her partnership interest for cash, and although this proposal was 
not generally objectionable the attorney responded by pointing out that 
Taxpayer's general financial position suggested the most appropriate 
course would be the exchange of her interest for other income-producing 
property, rather than for cash. Mr. Blair did not then own such property, 
but subsequent investigation revealed that it could be obtained from the 
estate of Taxpayer's husband. The stage was then set for the following 
planned, integrated sequence of steps:

	(i) Taxpayer withdrew completely from the partnership in exchange for 
an undivided 50/225 interest in a parcel of real estate (the Pine Forest 
Apartments) owned by the partnership.

	(ii) Acting individually and as executrix of her husband's estate, 
Taxpayer then exchanged her interest in the Pine Forest Apartments for 
other real property (the Oglethorpe Shopping Center) belonging to the 
estate.

	(iii) Acting solely in her capacity as executrix, Taxpayer transferred 
the estate's interest in the Pine Forest Apartments for $200,000 cash to 
the Blairs' newly erected closely held corporation (the Blair Investment 
Company).

	(iv) Finally, the Blair Investment Company transferred its 50/225 
interest in the Pine Forest Apartments to the partnership in exchange for 
the partnership interest formerly owned by Taxpayer. <>


	The Government argues that the ultimate consequence of these steps was 
in every material respect equivalent to that which would have resulted 
from a taxable sale. The partnership continued to own the same interest in 
the Pine Forest Apartments that it had purported to distribute in 
liquidation of Taxpayer's partnership interest, while the Blairs acquired 
Taxpayer's partnership interest in return for a $200,000 cash outlay. On 
the other hand, Taxpayer contends that the entire transaction was nothing 
more than a perfectly legitimate tax-free liquidation followed by an 
equally legitimate tax-free exchange of like-kind property under section 
1031, and that it must therefore be governed by the long-established rule 
that a taxpayer may properly take advantage of any method allowed by law 
to avoid taxes. Rupe Investment Corp. v. Commissioner, 5 Cir., 1959, 266 
F.2d 624, 629.

	The critical significance of step (iv) grows out of the two parallel 
assertions implicit in the Government's theory of the case. First, as has 
long been recognized, the substance rather than the form of a transaction 
determines its tax consequences, particularly if the form is merely a 
convenient device for accomplishing indirectly what could not have been 
achieved by the selection of a more straightforward route <> 
"To permit the true nature of a transaction to be disguised by mere 
formalisms, which exist solely to alter tax liabilities, would seriously 
impair the effective administration of the tax policies of Congress." 
Commissioner v. Court Holding Co., 1945, 324 U.S. 331, 334, 65 S. Ct. 707, 
____, 89 L. Ed. 981, 985. Transparent devices totally devoid of any 
non-tax significance to the parties <> cannot pass muster even 
though a literal reading of the statutory language might suggest 
otherwise. Commissioner v. P. G. Lake Inc., 1958, 356 U.S. 260, 266-67, 78 
S. Ct. 691, ____, 2 L. Ed. 2d 743, 749. The tax policy of the United 
States is concerned with realities rather than appearances, and when an 
illusory facade is constructed solely for the purpose of avoiding a tax 
burden the astute taxpayer cannot thereafter claim that a court is bound 
to treat it as being a genuine business arrangement. See Casner v. 
Commissioner, 5 Cir., 1971, ____ F.2d ____ [No. 29290, September 27, 1971, 
slip op. pp. 40-44].

	A corollary proposition, equally well established, is that the tax 
consequences of an interrelated series of transactions are not to be 
determined by viewing each of them in isolation but by considering them 
together as component parts of an overall plan. Schroll, Inc. v. 
Commissioner, 5 Cir. 1971, 447 F.2d 612 [No. 29207, August 13, 1971]; 
Waterman S.S. Corp. v. Commissioner, 5 Cir., 1970, 430 F.2d 1185, 1193-94, 
cert. denied, 1971, 401 U.S. 939, 91 S. Ct. 936 28 L. Ed. 2d 219; Redwing 
Carriers, Inc. v. Tomlinson, 5 Cir., 1968, 399 F.2d 652, 658; Davant v. 
Commissioner, 5 Cir., 1966, 366 F.2d 874, cert. denied, 1967, 386 U.S. 
1022, 87 S. Ct. 1370, 18 L. Ed. 2d 460; Kinney v. United States, 5 Cir., 
1966, 358 F.2d 738, 739; United States v. General Geophysical Co., 5 Cir., 
1961, 296 F.2d 86, cert. denied, 1962, 369 U.S. 849, 82 S. Ct. 932, 8 L. 
Ed. 2d 8; Kanawha Gas & Utilities Co. v. Commissioner, 5 Cir., 1954, 214 
F.2d 685, 691. Taken individually -- or a few, but not all, steps at a 
time -- each step in the sequence may very well fit neatly into an untaxed 
transactional compartment. But the individual tax significance of each 
step is irrelevant when, considered as a whole, they all amount to no more 
than a single transaction which in purpose and effect is subject to the 
given tax consequence.

	Here the successful application of these principles depends upon a 
showing by the Government that, while in form these transfers may appear 
to be no more than a liquidation of a partnership interest followed by a 
tax-free section 1031 exchange, <> in substance they are really 
nothing more than a camouflaged sale of a partnership interest 
masquerading as a liquidation. But in order to reach this conclusion it 
must be shown that the character of the transaction is in every respect, 
other than the superficial and irrelevant one of form, a sale, resulting 
in precisely those consequences that would have occurred had Taxpayer 
simply sold her interest in the partnership to the partnership or to the 
surviving partners for $200,000 cash and then purchased with that money 
her income-producing property. And it would be an equivalent transaction 
if the relative positions of the parties following this well-engineered 
series of exchanges was for all practical purposes substantially the same 
as it would have been had they chosen the direct rather than the 
circuitous route.

	Obviously what happened here was not equivalent to a sale unless the 
final step (iv) was consummated -- that is, unless Mrs. Wilson's undivided 
50/225 interest in the Pine Forest Apartments ultimately found its way 
back into the partnership now owned by the two Blairs. If it had not, 
Taxpayer's partnership interest would have been "liquidated" in every 
conceivable sense of that term, and the complete obliteration of it simply 
could not have been characterized as a "sale" if none of it had survived 
to be "sold."

	However, the partnership interest did survive because, as the parties 
have stipulated (see note 3, supra), it was transferred to the Blair 
Investment Company in return for its undivided interest in the Pine Forest 
Apartments. In return for its $200,000 cash payment the corporation (Blair 
Investment) received exactly the partnership interest it would have 
obtained by way of a direct purchase from Taxpayer. A sale, not a 
"liquidation," occurred because what had formerly been Taxpayer's 
partnership interest was acquired by the Blairs' corporate alter ego and 
the relative economic positions of the parties were the same as they 
ultimately would have been had a direct sale taken place.

	Moreover, the fact of the eventual transfer of the corporation's 
undivided interest in the Pine Forest Apartments back into the partnership 
is of crucial evidentiary significance in the final analysis of whether 
the essence of the arrangement was a "sale" or "liquidation." For while 
the proper characterization of the transaction may depend upon whether the 
participants intended to effect a sale or a liquidation, that intention 
cannot be conclusively presumed merely because the tax-conscious litigant 
attaches a particular label to his actions. "If the 'sale' is a sham it 
will be disregarded and a true sale is not made a liquidation by mere 
words." Miller v. United States, Ct. Cl., 1967, 181 Ct. Cl. 331, 344, n. 
3. In short, merely calling the scheme a liquidation does not make it one.

	What does, instead, make the transaction in question a sale is the fact 
that while theoretically a matter of indifference to Taxpayer, 
consummation of the step (iv) was practically essential to its success, 
since without it there might have been no deal. Mr. Blair wanted 
Taxpayer's partnership interest, and to get it he was willing to go along 
with a suggested alternative plan which he thought amounted to practically 
the same thing as a direct sale (see note 5, supra). The key was to keep 
Pine Forest Apartments in the partnership. From the partnership's 
standpoint, this goal would have been frustrated by transferring (and 
keeping) 50/225 of it in the separate corporate entity, a result which 
might have brought about substantial tax disadvantages. From Taxpayer's 
standpoint, she needed (or desired) income-producing properties which she 
could not get from the partnership in a liquidating distribution. To 
acquire such property (Oglethorpe Shopping Center) she needed cash to pay 
the seller. <> But it was disadvantageous for her to get the 
cash on distribution from the partnership. This cash came through the 
payment of $200,000 by the corporation for the Pine Forest Apartments 
interest, which soon got back to the partnership exactly as it all began. 
And her partnership interest was then owned by the Blairs. Taxwise, taking 
two to tango, the transaction had to have the equivalent of step (iv) as 
an indispensable ingredient. The District Court was therefore correct in 
holding there to be no material issue of fact in controversy, since 
whether Taxpayer was conscious of step (iv) or not was irrelevant.

	Our conclusion is not affected by the undisputed fact that Taxpayer 
disposed of her entire partnership interest rather than a portion of it. 
The steps with which we are concerned are those that lead inevitably to a 
result in every respect equivalent to a taxable sale, even though 
individually any one step may have the technical form of a section 736 
liquidation. A step transaction is not magically transformed into 
something else merely because one of the critical steps was not further 
subdivided into a piecemeal disposition of the partnership interest, and 
it makes no difference that following the initial transfer involved in 
step (1) Taxpayer ostensibly retained no interest whatever. The entire 
transaction on paper may have been flawless, but it was nevertheless a 
sale after all was said and done. <>

	Nor do we overlook Taxpayer's clearly correct contention that Congress, 
in enacting these provisions, has provided an individual with alternative 
methods for divesting himself of a partnership interest. See Foxman v. 
Commissioner, 3 Cir., 1965, 352 F.2d 466; Paul J. Kelly, 1970, 29 T.C.M. 
1090; Andrew O. Stilwell, 1966, 46 T.C. 247. Taxpayers have a choice 
between selling and liquidating. But they cannot compel a court to 
characterize the transaction solely upon the basis of a concentration on 
one facet of it when the totality of circumstances determines its tax 
status. The most obvious answer to Taxpayer's argument that the parties' 
characterization is conclusive is that such a result would completely 
thwart the Congressional policy to tax transactional realities rather than 
verbal labels. The tax is realized on the sale of a partnership interest, 
and it cannot be avoided by the simple expedient of constructing an 
admittedly clever series of successive transfers, each non-taxable in 
itself, that together work the same result. Otherwise form, rather than 
substance, would invariably prevail.

	The judgment of the District Court is reversed and the cause remanded 
for entry of judgment in favor of the United States. Reversed and 
Remanded.


<>

	1/ Recognition and Character of Gain or Loss on Sale or Exchange.

	In the case of a sale or exchange of an interest in a partnership, gain 
or loss shall be recognized to the transferor partner. Such gain or loss 
shall be considered as gain or loss from the sale or exchange of a capital 
asset, except as otherwise provided in section 751 (relating to 
unrealistic receivables and inventory items which have appreciated 
substantially in value)." 26 U.S.C.A. section 741.

	2/ "Payments to a Retiring Partner or a Deceased Partner's Successor in 
Interest.

	*    *    *    *    *

	(b) Payments for Interest In Partnership.--

	(1) General rule. -- Payments made in liquidation of the interest of a 
retiring partner or a deceased partner shall, to the extent such payments 
(other than payments described in paragraph (2) are determined, under 
regulations prescribed by the Secretary or his delegate, to be made in 
exchange for the interest of such partner in partnership property, be 
considered as a distribution by the partnership and not as a distributive 
share or guaranteed payment under subsection (a)." 26 U.S.C.A. section 
736(b).

	Section 761(d) defines "liquidation of a partner's interest" as "the 
termination of a partner's entire interest in a partnership by means of a 
distribution, or series of distributions, to the partner by the 
partnership."


	3/ In its order granting Taxpayer's motion for summary judgment the 
District Court stated that all steps took place on November 30, 1962. 
However, there is no evidence in the record establishing either the 
existence or timing of the fourth step, and the only reference to it is in 
the deposition of Mr. Blair's accountant, who stated that he was not 
present at the closing on November 30, that he did not know whether all 
the transactions took place on the same day, but that he "assumed" they 
did. This led to our post-argument request that the parties stipulate the 
missing facts regarding this step.

	Fortunately the gap in the factual landscape was filled by the 
stipulation that "the Blair Investment Company transferred its interest in 
the Pine Forest Apartments to the Pine Forest Associates partnership, and 
that such transfer took place no later than January 31, 1963, as shown by 
the partnership return of the Pine Forest Associates filed for its fiscal 
year ending on that date."

	4/ Commissioner v. Tower, 1946, 327 U.S. 280, 288-89, ____ S. Ct. ____, 
____, 90 L. Ed. 670, 676-77; Helvering v. Clifford, 1940, 309 U.S. 331, 
____ S. Ct. ____, 84 L. Ed. 788; Higgins v. Smith, 1939, 308 U.S. 473, 
476-77 ____, S. Ct. ____, ____, 84 L. Ed. 406, 410; Griffiths v. 
Helvering, 1939, 308 U.S. 355, 357-58, ____, S. Ct. ____, ____, 84 L. Ed. 
319, 322; Minnesota Tea Co. v. Helvering, 1938, 302 U.S. 609, 613-14, 58 
S. Ct. 393, ____, 82 L. Ed. 474, 477; Gregory v. Helvering, 1935, 293 U.S. 
465, 470, 55 S. Ct. 266, ____, 79 L. Ed. 596, 599.

	5/ In arguing that the technical form of the transaction must prevail 
here, Taxpayer has not once suggested any conceivable legitimate business 
purpose that might have dictated the utilization of such a convoluted 
sequence of preplanned paper exchanges in place of a direct sale for cash. 
See Knetsch v. United States, 1960, 364 U.S. 361, 81 S. Ct. 132, 5 L. Ed. 
2d 128. Indeed, Mr. Blair told the Board of Directors of the Blair 
Investment Corporation that the entire elaborate arrangement was "in net 
effect the same as his proposal." Mr. Blair's view of the transaction 
coincides with our own -- in every respect except its form it was a sale 
of the partnership interest rather than a liquidating distribution.

	6/ As an alternative ground for reversal the Government argues that the 
District Court improperly held Taxpayer's exchange of her interest in the 
apartments for the shopping center to be entitled to the nonrecognition of 
gain or loss treatment afforded by section 1031, since the apartment 
property was encumbered by substantial liabilities from which Taxpayer had 
been relieved. However, since this contention was never presented to the 
District Court, we do not consider it now.

	7/ It is just a coincidence that she was both the willing buyer and the 
willing seller.

	8/ "A given result at the end of a straight path is not made a 
different result because reached by following a devious path." Minnesota 
Tea Co., supra, 302 U.S. at 613, ____ S. Ct. at ____, 82 L. Ed. at 477.