PUBLISH
IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
------------------------------------------- FILED U.S. COURT OF APPEALS No. 98-8298 ELEVENTH CIRCUIT 03/05/99 -------------------------------------------- THOMAS K. KAHN CLERK D. C. Docket No. 24341-95
ROBERT R. PLANTE and MARY B. PLANTE,
Petitioners-Appellants,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
----------------------------------------------------------------
Appeal from the Decision of the United States Tax Court
----------------------------------------------------------------
(March 5, 1999)
Before EDMONDSON and BLACK, Circuit Judges, and RESTANI*, Judge.
_______________
* Honorable Jane A. Restani, Judge, U.S. Court of International Trade, sitting by designation. PER CURIAM:
Taxpayers, Robert Plante and Mary Plante, appeal the tax
court’s decision that they are not entitled to a business bad-debt
deduction for 1991 and the associated carryover losses to later
years. We see no reversible error and affirm.
BACKGROUND
In 1987, Robert Plante (Plante) purchased a marina. He
then transferred all of the marina’s assets to Boating Center
of Baltimore, Inc. (BCBI): Plante was president and sole
shareholder of BCBI. Then, Plante transferred a total of
2 $320,000 to BCBI, evidenced by promissory notes. Over the
next four years, Plante advanced another $155,000 to BCBI.
These advances were not recorded as promissory notes.
BCBI suffered heavy losses; so, Plante decided to sell the
business. Preliminary negotiations with a buyer resulted in a
selling price of $1,050,000. At closing, on 20 December 1991, the
buyer learned about the $475,000 in advances Plante made to
BCBI: advances reflected in BCBI’s books as a liability to
Plante. When the buyer insisted that liability from BCBI to
Plante be eliminated, the parties, in Maryland, added this
provision to the Stock Purchase Agreement:
3 The shareholder, as the sole Shareholder and as
President of the Corporation, hereby makes the
following representations . . .
Shareholder has transferred Four
Hundred Seventy-Five Thousand ($475,000.00)
Dollars of notes and accrued interest of the
Corporation due Shareholder as of 11/1/91 to
the equity account of the Corporation and
has made this an irrevocable capital
contribution to the Corporation. The notes,
accrued interest and capital lease due 4 Shareholder as of the Closing have been
tendered to Buyer in exchange for Buyer
notes.
In this appeal, Plante asks us to treat the $475,000 as a
bad debt, instead of a capital contribution because this
treatment would allow him to pay less tax. The Tax Court,
however, treated the $475,000 as a capital contribution and
ordered Plante to pay the IRS $8,849.
DISCUSSION 5 We must determine whether the $475,000 Plante advanced to
BCBI was a loan or a capital contribution. We usually apply a 13-
factor test to make this determination. See Lane v. United
States, 742 F.2d 1311, 1314-15 (11th Cir. 1984).
After “[t]aking into account the [thirteen] factors,” the Tax
Court decided that the $155,000 not evidenced by promissory notes
was not deductible. The Tax Court reasoned that Plante failed to
carry his burden of proof on his claimed deduction because Plante
provided “virtually no information regarding $155,000 of the
amount here in dispute[.]”
6 We do not need to decide today, however, if the Tax Court
correctly applied the 13-factor test to the sum not tied to
1 promissory notes. The Tax Court’s decision -- based on a different
theory -- about the $320,000 evidenced by promissory notes that
Plante advanced to BCBI applies with equal force to the full
1 Two considerations make us hesitant to review the Tax Court’s application of this test. First, the Tax Court did not provide a written explanation for its application of the factors. Second, the Tax Court did not make explicit findings on the corporate books, interest payments, and testimony of Plante suggesting that the advances, at a time before the sale, were loans. 7 2 amount ($475,000) claimed by Plante and provides sufficient
grounds to affirm the Tax Court’s decision.
When a taxpayer characterizes a transaction in a certain
form, the Commissioner may bind the taxpayer to that form for
tax purposes. See Bradley v. United States, 730 F.2d 718, 720 (11th
Cir. 1984). This is the rule: “[a] party can challenge the tax
consequences of his agreement as construed by the Commissioner
only by adducing proof which in an action between the parties
would be admissible to alter that construction or to show its
unenforceability because of mistake, undue influence, fraud, duress,
2 Before the Tax Court, “[n]either party ma[de] a distinction between the portion of the $475,000 in unpaid advances represented by notes and the remaining portion.” 8 3 et cetera.” Id. This rule is named the Danielson rule after a case
in which the rule was applied. See Commissioner v. Danielson, 378
F.2d 771, 775 (3d Cir. 1967).
The Tax Court invoked the Danielson rule when it said that the
Stock Purchase “[A]greement clearly makes the disposition of the
notes part of the sale transaction and characterizes their
3 In his brief, Plante asserts that he “went along with the changes [to the Stock Purchase Agreement] because he was under duress.” Plante, however abandoned a true duress claim during oral argument by saying: “First of all, the taxpayer here does not assert that . . . there was any duress or overreaching in the transaction with the buyer.” Even when we consider what Plante has called a duress argument, we must reject it as meritless: general economic hardship is not “duress” for legal purposes. See Lee v. Flightsafety Servs. Corp., 20 F.3d 428, 432 (11th Cir. 1994); Blumenthal v. Heron, 274 A.2d 636, 640-41 (Md. 1971). 9 disposition as a contribution to BCBI’s capital.” We agree with
the Tax Court that Plante characterized his advances to BCBI as
capital contributions and may not now obtain the tax benefits
of treating the advances as loans to BCBI.
The Stock Purchase Agreement is unambiguous: “[Plante] has
transferred . . . $475,000.00 . . . of notes and accrued interest of
the Corporation due [Plante] as of 11/1/91 to the equity account of the
Corporation and has made this an irrevocable capital
contribution[.]” (emphasis added). This sentence characterizes
Plante’s advances as a capital contribution.
Plante, however, makes two arguments attempting to avoid
the Danielson rule. First, he says that the Stock Purchase 10 Agreement is ambiguous in characterizing his advances as
capital contributions and that, therefore, we must use evidence
extrinsic to the Agreement to decide if the advances were capital
contributions or loans. He says the Agreement is ambiguous
because the second sentence of the Agreement conflicts with the
first sentence. If the debt were transferred to equity on 11/1/91,
Free access — add to your briefcase to read the full text and ask questions with AI
PUBLISH
IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT
------------------------------------------- FILED U.S. COURT OF APPEALS No. 98-8298 ELEVENTH CIRCUIT 03/05/99 -------------------------------------------- THOMAS K. KAHN CLERK D. C. Docket No. 24341-95
ROBERT R. PLANTE and MARY B. PLANTE,
Petitioners-Appellants,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
----------------------------------------------------------------
Appeal from the Decision of the United States Tax Court
----------------------------------------------------------------
(March 5, 1999)
Before EDMONDSON and BLACK, Circuit Judges, and RESTANI*, Judge.
_______________
* Honorable Jane A. Restani, Judge, U.S. Court of International Trade, sitting by designation. PER CURIAM:
Taxpayers, Robert Plante and Mary Plante, appeal the tax
court’s decision that they are not entitled to a business bad-debt
deduction for 1991 and the associated carryover losses to later
years. We see no reversible error and affirm.
BACKGROUND
In 1987, Robert Plante (Plante) purchased a marina. He
then transferred all of the marina’s assets to Boating Center
of Baltimore, Inc. (BCBI): Plante was president and sole
shareholder of BCBI. Then, Plante transferred a total of
2 $320,000 to BCBI, evidenced by promissory notes. Over the
next four years, Plante advanced another $155,000 to BCBI.
These advances were not recorded as promissory notes.
BCBI suffered heavy losses; so, Plante decided to sell the
business. Preliminary negotiations with a buyer resulted in a
selling price of $1,050,000. At closing, on 20 December 1991, the
buyer learned about the $475,000 in advances Plante made to
BCBI: advances reflected in BCBI’s books as a liability to
Plante. When the buyer insisted that liability from BCBI to
Plante be eliminated, the parties, in Maryland, added this
provision to the Stock Purchase Agreement:
3 The shareholder, as the sole Shareholder and as
President of the Corporation, hereby makes the
following representations . . .
Shareholder has transferred Four
Hundred Seventy-Five Thousand ($475,000.00)
Dollars of notes and accrued interest of the
Corporation due Shareholder as of 11/1/91 to
the equity account of the Corporation and
has made this an irrevocable capital
contribution to the Corporation. The notes,
accrued interest and capital lease due 4 Shareholder as of the Closing have been
tendered to Buyer in exchange for Buyer
notes.
In this appeal, Plante asks us to treat the $475,000 as a
bad debt, instead of a capital contribution because this
treatment would allow him to pay less tax. The Tax Court,
however, treated the $475,000 as a capital contribution and
ordered Plante to pay the IRS $8,849.
DISCUSSION 5 We must determine whether the $475,000 Plante advanced to
BCBI was a loan or a capital contribution. We usually apply a 13-
factor test to make this determination. See Lane v. United
States, 742 F.2d 1311, 1314-15 (11th Cir. 1984).
After “[t]aking into account the [thirteen] factors,” the Tax
Court decided that the $155,000 not evidenced by promissory notes
was not deductible. The Tax Court reasoned that Plante failed to
carry his burden of proof on his claimed deduction because Plante
provided “virtually no information regarding $155,000 of the
amount here in dispute[.]”
6 We do not need to decide today, however, if the Tax Court
correctly applied the 13-factor test to the sum not tied to
1 promissory notes. The Tax Court’s decision -- based on a different
theory -- about the $320,000 evidenced by promissory notes that
Plante advanced to BCBI applies with equal force to the full
1 Two considerations make us hesitant to review the Tax Court’s application of this test. First, the Tax Court did not provide a written explanation for its application of the factors. Second, the Tax Court did not make explicit findings on the corporate books, interest payments, and testimony of Plante suggesting that the advances, at a time before the sale, were loans. 7 2 amount ($475,000) claimed by Plante and provides sufficient
grounds to affirm the Tax Court’s decision.
When a taxpayer characterizes a transaction in a certain
form, the Commissioner may bind the taxpayer to that form for
tax purposes. See Bradley v. United States, 730 F.2d 718, 720 (11th
Cir. 1984). This is the rule: “[a] party can challenge the tax
consequences of his agreement as construed by the Commissioner
only by adducing proof which in an action between the parties
would be admissible to alter that construction or to show its
unenforceability because of mistake, undue influence, fraud, duress,
2 Before the Tax Court, “[n]either party ma[de] a distinction between the portion of the $475,000 in unpaid advances represented by notes and the remaining portion.” 8 3 et cetera.” Id. This rule is named the Danielson rule after a case
in which the rule was applied. See Commissioner v. Danielson, 378
F.2d 771, 775 (3d Cir. 1967).
The Tax Court invoked the Danielson rule when it said that the
Stock Purchase “[A]greement clearly makes the disposition of the
notes part of the sale transaction and characterizes their
3 In his brief, Plante asserts that he “went along with the changes [to the Stock Purchase Agreement] because he was under duress.” Plante, however abandoned a true duress claim during oral argument by saying: “First of all, the taxpayer here does not assert that . . . there was any duress or overreaching in the transaction with the buyer.” Even when we consider what Plante has called a duress argument, we must reject it as meritless: general economic hardship is not “duress” for legal purposes. See Lee v. Flightsafety Servs. Corp., 20 F.3d 428, 432 (11th Cir. 1994); Blumenthal v. Heron, 274 A.2d 636, 640-41 (Md. 1971). 9 disposition as a contribution to BCBI’s capital.” We agree with
the Tax Court that Plante characterized his advances to BCBI as
capital contributions and may not now obtain the tax benefits
of treating the advances as loans to BCBI.
The Stock Purchase Agreement is unambiguous: “[Plante] has
transferred . . . $475,000.00 . . . of notes and accrued interest of
the Corporation due [Plante] as of 11/1/91 to the equity account of the
Corporation and has made this an irrevocable capital
contribution[.]” (emphasis added). This sentence characterizes
Plante’s advances as a capital contribution.
Plante, however, makes two arguments attempting to avoid
the Danielson rule. First, he says that the Stock Purchase 10 Agreement is ambiguous in characterizing his advances as
capital contributions and that, therefore, we must use evidence
extrinsic to the Agreement to decide if the advances were capital
contributions or loans. He says the Agreement is ambiguous
because the second sentence of the Agreement conflicts with the
first sentence. If the debt were transferred to equity on 11/1/91,
according to Plante, then Plante could not own the notes he
purported to transfer on 12/20/91.
We disagree. We do not think the first sentence means that
the advances were made to equity on 11/1/91. We think “as of 11/1/91”
is the date for calculating BCBI’s liability, not the date of the
capital transfer because “as of 11/1/91” immediately follows “due 11 4 [Plante].” And, if “as of 11/1/91” meant the transfer took place on
1 November, the Agreement would probably be written “on 11/1/91.”
Also, if the advances were transferred to equity on 1 November,
as Plante contends, then the buyer would not have been concerned
about BCBI’s potential liability to Plante on 12/20/91. So, the
advances were made into capital contributions on 20 December
1991.
4 This reading is consistent with a stipulation agreed to by Plante and the IRS: “As of November 1, 1991, the petitioner had unpaid advances to the corporation totaling $475,000.00.” Also, the preamble to the stipulation makes clear that the IRS did not agree that use of the word “advance” means “loans for federal income tax purposes.” 12 Regardless of whether the advances were debts at one time,
the advances were characterized at closing as capital
contributions. Tendering the “notes, accrued interest and capital
lease” to the buyer -- the words of the second sentence of the Stock
Purchase Agreement -- was a way to implement the buyer’s and
seller’s plan to extinguish potential debts of BCBI to Plante. No
inconsistency or ambiguity, therefore, exists in the pertinent
provision. Having made his decision to treat the advances to
BCBI as capital contributions to close the million-dollar deal,
Plante cannot now look for recoupment from the IRS.
Plante’s second argument to avoid the Danielson rule is that
the Danielson rule should not apply in this case. He notes, correctly, 13 that one purpose of the Danielson rule is to prevent the IRS from
being “whipsawed”: litigating against two parties, like Plante and
BCBI, to collect tax from only one party. Plante asserts BCBI was
insolvent. Then, he argues that the Danielson rule does not apply
if the corporation was insolvent before and after the notes were
canceled because “cancellation of the debt will not result in a
taxable income to BCBI.” No danger of “whipsaw” exists, therefore,
says Plante.
The record is not plain that BCBI was insolvent before and
after the sale. In any event, the Danielson rule has other
purposes, however, that are applicable to this case. “If a party
could alter the express terms of his contract by arguing that the 14 terms did not represent economic reality, the Commissioner would
be required to litigate the underlying factual circumstances of
‘countless’ agreements.” North Am. Rayon Corp. v. Commissioner,
12 F.3d 583, 587 (6th Cir. 1993). Also, business agreements are often
structured with an eye toward the tax consequences of the
5 agreement. Allowing one party to realize a better tax
consequence than the consequence for which it bargained is to
grant “a unilateral reformation” of the agreement, which
5 The Stock Purchase Agreement was negotiated with an eye to the tax consequences. According to Plante’s brief: “The terms of the Stock Purchase Agreement were dictated by [the buyer] to gain tax and other advantages.” 15 6 considerably undermines the certainty of business deals.
Danielson, 378 F.2d at 775.
Plante raises a number of other arguments in Sections A, E,
and F of his brief, as well as arguments about other
interpretations of the Danielson rule, about alternate
constructions of the Stock Purchase Agreement, and about
extrinsic evidence. We have considered these arguments, but we
7 cannot agree with the arguments.
6 We think these reasons for the Danielson rule also refute Plante’s arguments based on Comdisco, Inc. v. United States, 756 F.2d 569 (7th Cir. 1985) (investment-tax-credit case).
7 We are unpersuaded by Plante’s arguments based on Giblin v. Commissioner, 227 F.2d 692 (5th Cir. 1955). Giblin is distinguishable from this case because Giblin’s debt cancellation, 16 We conclude that Plante’s advances were a capital
contribution and, therefore, Plante was not entitled to a business
bad-debt deduction and associated carryover losses.
We AFFIRM.
apparently, was not specifically characterized as a capital contribution and because it was clear from the Giblin record -- as it is not clear here -- that the corporation was insolvent before and after the cancellation. We are more persuaded by Lidgerwood Mfg. Co. v. Commissioner, 229 F.2d 241 (2d Cir. 1956). Also, Giblin pre-dates our adoption of the Danielson rule. See Spector v. Commissioner, 641 F.2d 376 (5th Cir. 1981). 17