See my blogpost “We Don’t Need No Stinkin’ Factors,” 5/15/12. Today, Judge Haines follows Judge Goeke’s earlier deconstruction of a debt-vs-equity deal with a similar nonchalant waltz through eleven (count ‘em, eleven) supposed factors, and finds that MBA Real Estate, Inc., 2015 T. C. Memo. 111, filed 6/15/15, didn’t buy a bunch of contracts for brokerage commissions from J. Michael Bell and Sandra L. Bell.

No, J. Mike and Sandy 351’d the contracts to MBA in exchange for all the stock of MBA. For the purists among us, Section 351 is the tax-free incorporation freebie. If you give property (tangible or intangible) to a corporation in exchange for at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation, no tax to corporation or to shareholder-contributor. And carryover basis in all transferred property.

J. Mike and Sandy were servicers and sellers for distressed bank-owned real estate in the last California real estate meltdown (2008, for those with short memories).

J. Mike and Sandy ran their business under an assumed name, but decided to sell 40 contracts they had to MBA, a corporation they formed. Their purchase agreement with MBA did have interest payments and fixed date of final payment, and they claimed they wanted an income stream to shield them from the vicissitudes of the California crapshoot (I mean real estate market).

J. Mike and Sandy are Golsenized to Ninth Circuit. “That Court of Appeals applies an 11-factor test to determine whether a shareholder’s transfer to a corporation is a sale or a capital contribution. No single factor is controlling, and the facts and circumstances of each case must be taken into consideration. The primary purpose of the factors is to help the Court determine the parties’ intent ‘through their objective and subjective expressions.’” 2015 T. C. Memo. 111, at p. 10 (Citations omitted).

In other words, pick the result you want and you’ll find the factors you need. Or better still, which factors to ignore.

Well, although it sure looks like J. Mike and Sandy wanted to sell the contracts to MBA, MBA had no assets except $500 in cash that J. Mike and Sandy threw in after the fact (2015 T. C. Memo. 111, at p. 15). So whatever cash J. Mike and Sandy were to get had to come from MBA’s E&P, and MBA had a bushelbasketful.

No third-party lender would lend MBA the quarter-million it needed to pay off J. Mike and Sandy until the loot from the contracts came in, if ever.

So however well J. Mike and Sandy papered the deal, they’re out of luck.

Here’s the result Judge Haines finds: “In substance, in order to incorporate Mr. Bell’s existing business, the Bells transferred $500 in cash and all of the sole proprietorship’s assets to MBA solely in exchange for MBA’s stock. The Bells were in control of MBA immediately after the transfer of cash because they became MBA’s sole shareholders. Thus, section 351 governs the tax consequences of this transaction.” 2015 T. C. Memo. 111, at p. 18.

Are you convulsed with shock? I’m not.

Of course, if no sale, then no capital gain on transfer of the contracts, everything paid to J. Mike and Sandy are dividends and taxable at ordinary, and, by the way, IRS beat the SOL on the SNODs.

Oh, and MBA has no basis in the transferred contracts or in J. Mike’s and Sandy’s goodwill in their old business, so no depreciation deduction for MBA.

Who needs factors?