                       United States Court of Appeals,

                                Fifth Circuit.

                                 No. 91–4395.

         MONTELEPRE SYSTEMED, INC., Petitioner–Appellant,

                                      v.

     COMMISSIONER OF INTERNAL REVENUE, Respondent–Appellee.

                                March 30, 1992.

Appeal from a Decision of the United States Tax Court.

Before REAVLEY, HIGGINBOTHAM and DEMOSS, Circuit Judges.

     REAVLEY, Circuit Judge:


     Taxpayer Montelepre Systemed, Inc. (Systemed) gave up one of

its rights under a management contract in exchange for money.         The

Tax Court characterized the payment that Systemed received as

compensation taxable under 26 U.S.C. § 83 in the first year that

Systemed's right ceased being subject to a substantial risk of

forfeiture.      We hold that Systemed's right was subject to a

substantial risk of forfeiture until Systemed disposed of that

right,   and    that     the   assignment-of-income   doctrine   precludes

application of 26 U.S.C. § 337 to the payment that Systemed

received.      We affirm the Tax Court's judgment in favor of the

Commissioner of Internal Revenue (CIR).



                                 I. BACKGROUND



     Thian and Company (Thian), a Louisiana limited partnership,

developed Chalmette General Hospital (Chalmette General).            Just

before Chalmette General opened in 1975, Thian entered into a
hospital management contract (the Contract) with Systemed. At this

time, Paul Montelepre held both a controlling interest in Systemed

and a general partnership interest in Thian.



     The Contract provided that Thian would not sell Chalmette

General without first affording Systemed the right of first refusal

(the Right).1   The Contract precluded Systemed from assigning the

Right.     The Contract did not specify whether Systemed's Right

terminated with the Contract.



     In December 1982, while Thian and Systemed were conducting

business    under   the    Contract,   Qualicare     of   Chalmette,   Inc.

(Qualicare) offered Systemed $1.5 million to forfeit the Right.

Qualicare made its offer contingent on its purchase of Chalmette

General.     Systemed     accepted.    On   March   15,   1983,   Systemed's

shareholders formally adopted a plan of liquidation.               Two days

later, Qualicare acquired Chalmette General and paid Systemed $1.5

million.



     1
      The Contract, referring to Systemed as "Operator" and Thian
as "Owner," specified Systemed's Right as follows:

            In the event the Owner receives an offer (the "Offer")
            from any third party to acquire the Hospital or all or
            substantially all of the assets of Owner which offer it
            desires to accept, the Owner shall give written notice
            thereof to the Operator setting forth in detail the
            terms and conditions of the Offer. The Operator shall
            have the option for sixty (60) days following notice to
            it of the Offer to purchase the Hospital or assets
            covered by the Offer upon the terms and conditions set
            forth therein. If the Operator does not exercise its
            option, the Owner may sell the Hospital or such assets
            in accordance with the terms of the Offer.
     Systemed   did   not   include   the   $1.5   million   payment   from

Qualicare in its taxable income for the year ending March 31, 1983,

and instead explained that this "capital gain [was] not recognized

per [26 U.S.C. §] 337 liquidation."     In 1988, CIR sent Systemed the

following notice of deficiency:


     the $1,500,000 paid to you by Qualicare as a management fee is
     taxable income under section 83 of the Internal Revenue Code.
     Therefore, your taxable income is increased $1,500,000.


Systemed contested CIR's proposed income increase by filing a

petition in the Tax Court.       The Tax Court issued an opinion in

which it considered the parties' arguments under section 83 and

ruled in CIR's favor.



                             II. DISCUSSION



     Systemed contends on appeal that section 83 does not support

CIR's notice of deficiency and section 337 precludes it.



A. SECTION 83



     Section 83(a) explains how property received in exchange for

services is taxed:


     If, in connection with the performance of services, property
     is transferred to any person other than the person for whom
     such services are performed, the excess of—

           (1) the fair market value of such property ... at the
           first time the rights of the person having the beneficial
           interest in such property are transferable or are not
           subject to a substantial risk of forfeiture, whichever
           occurs earlier, over
           (2) the amount ... paid for such property,

     shall be included in the gross income of the person who
     performed such services in the first taxable year in which the
     rights of the person having the beneficial interest in such
     property are ... not subject to a substantial risk of
     forfeiture....


26 U.S.C. § 83(a) (emphasis added).           The Tax Court held that

Systemed received the Right as part of its compensation for its

hospital management services under the Contract, and therefore

section 83 governs the valuation and taxation of the Right.                To

hold Systemed liable for tax on the $1.5 million payment in 1983,

the Tax Court also held that, until Qualicare bought Chalmette

General, Systemed held the Right subject to a substantial risk of

forfeiture.     The    Tax     Court   understood   the      Right    to   be

"substantially nonvested" in 1983, meaning that the Right was both

subject to a substantial risk of forfeiture and nontransferable.

See Treas.Reg. § 1.83–3(b).      And if


     substantially nonvested property (that has been transferred in
     connection with the performance of services) is subsequently
     sold or otherwise disposed of to a third party in an arm's
     length transaction while still substantially nonvested, the
     person who performed such services shall realize compensation
     in an amount equal to the excess of—

     (i) The amount realized on such sale or other disposition,
     over

     (ii) The amount (if any) paid for such property.

     Such amount of compensation is includible in his gross income
     in accordance with his method of accounting.

Treas.Reg. § 1.83–1(b).

     On   appeal,   Systemed    does   not   dispute   the    Tax     Court's

characterization of the Right as section 83 property or the Tax

Court's holding that the Right was never transferable.               Systemed
only argues that the Right was not subject to a substantial risk of

forfeiture in the tax year ending March 31, 1983, so section 83

applied in a previous tax year for which CIR has not sought tax

adjustment.     We reject the two theories that Systemed offers in

support of this argument.



1. Right Survival of Contract



     Systemed contends that a right of first refusal relating to

immovable   property   is   a   sui    generis   real   right      that   is   not

extinguished upon termination of the Contract, citing Crawford v.

Deshotels, 359 So.2d 118, 122 (La.1978) and Terrell v. Messenger,

428 So.2d 1241, 1247 (La.Ct.App.1983) in support.                   While these

cases suggest that a recorded right of first refusal can be a real

right   under   Louisiana   law,      neither    purports     to   establish    a

universal rule for the duration of that right.



        The parties' intent governs our construction of the Right's

duration.   Price v. Town of Ruston, 132 So. 653, 655–56 (La.1931);

see also Ebrecht v. Ponchatoula Farm Bureau Ass'n, 498 So.2d 55, 57

(La.Ct.App.1986) ("[L]essor's inclusion of the "first right to

purchase' in a lease agreement without an option to renew the lease

and the plaintiff's failure to show that the lessee ever attempted

to negotiate a new lease are evidence that the term of the "first

right to purchase' was intended to be limited by the length of the

lease;" "When the lease terminated by its own terms, the "right of

first refusal' also terminated.");          1A CORBIN   ON   CONTRACTS § 261 at
476 (1963) ("In all cases, interpretation [of a right of first

refusal] requires knowledge of the entire context, context of facts

as well as context of words.").



       While   the      Contract   specifies   no    time   for    the   Right's

termination,      the    Contract's   provisions     and    the   circumstances

surrounding the Contract's execution indicate that the parties

intended the Right to be coterminous with the Contract.                  The way

that Systemed and Thian phrased the Right indicates that they

understood that, to exercise the Right, Systemed must still be

Chalmette General's operator.         The Contract language establishing

the Right only refers to Systemed as "Operator."              Moreover, in the

Contract's section 10, immediately after establishing Systemed's

Right, the Contract states:

       In the event that the [hospital's third-party] purchaser
       desires to continue the services of Operator pursuant to this
       contract, then this agreement shall continue in force and
       Owner's obligations hereunder shall be transferred to the
       Purchaser at the act of sale. In the event that purchaser
       does not desire to continue the services of Operator pursuant
       to the terms of this contract, then this contract shall
       terminate upon the act of sale. In such latter event, any
       Management Fees accrued but deferred ... due Operator shall be
       paid in full.

This   language      illustrates    the   parties'   understanding       that   if

Systemed declined to purchase the hospital, Systemed could continue

operating the hospital under the Contract unless the new owner

chose to replace Systemed upon paying Systemed all fees due.                    But

these options for Systemed only make sense if the Contract still

governed the relationship between Systemed and Thian at the time

that Thian sold Chalmette General.             Reading this section of the

Contract as a whole, we think that the parties understood that
Systemed's Right was coterminous with the contract.



     Nothing in the Contract indicates that Thian granted Systemed

the Right indefinitely and unconditionally.               Had this been the

case, the parties would likely have recorded Systemed's Right

because without recordation or actual notice, Systemed could not

enforce its Right against third parties.          See E.P. Dobson, Inc. v.

Perritt, 566 So.2d 657, 660 (La.Ct.App.1990).            While Systemed was

managing Chalmette General under the Contract, it would necessarily

be aware of any prospective purchasers and could notify them of its

Right, so it is understandable that Systemed saw no need to record

the Right.



     We thus agree with the Tax Court that Systemed had to continue

performing substantial services under the Contract to retain the

Right.



2. Actual Risk of Contract Termination



     Systemed states that if the Right was coterminous with the

Contract, this fact only establishes that the Right was subject to

a risk of forfeiture.     Systemed argues that the Tax Court erred by

not considering all of this case's facts and circumstances to

assess the substantiality of the risk to which the Right was

subject.     See   Treas.Reg.    §    1.83–3(c)(1)     ("whether     a   risk    of

forfeiture   is    substantial   or    not   depends    upon   the   facts      and

circumstances").
      We agree with CIR that a facts and circumstances test is

unnecessary in this case.        Congress prescribes that "[t]he rights

of a person in property are subject to a substantial risk of

forfeiture if such person's rights to full enjoyment of such

property are conditioned upon the future performance of substantial

services by any individual."         26 U.S.C. § 83(c)(1).       And the House

Report on section 83(c)(1) explains that a

      substantial risk of forfeiture will be considered to exist
      where the person's rights to the full enjoyment of the
      property are conditioned upon his future performance of
      substantial services. In other cases the question of whether
      there is substantial risk of forfeiture depends upon the facts
      and circumstances.


H.R.REP. NO. 413, 91st Cong., 1st Sess., pt. 1, at 88 (1969),

reprinted in, 1969 U.S.C.C.A.N. 1645, 1735 (emphasis added);                 see

also Robinson v. Commissioner, 805 F.2d 38, 40 (1st Cir.1986)

(facts and circumstances test only applicable when section 83(c)(1)

does not apply).



      Systemed recognizes that the Contract required it to perform

substantial services, but simply argues that section 83(c)(1) only

applies to natural persons and not corporations such as itself.               In

support of its argument, Systemed points to the House Report's use

of   the   word   "his"   and   to   the   fact   that   the   performance   of

substantial services is a greater burden to individuals than to

corporations, which can simply hire more agents.               We find nothing

in the language or history of section 83 to suggest that Congress

intended to limit its application to natural persons.                  See 26

U.S.C. § 7701(a) (in Title 26, "where not otherwise distinctly
expressed or manifestly incompatible with the intent thereof—[t]he

term "person' shall be construed to mean and include ... a ...

corporation").     Moreover, we do not agree that individuals are

necessarily more burdened by performing substantial services than

corporations.     And even if individuals are always more burdened,

nothing suggests that Congress considered the relative burden of

performing substantial services a significant consideration in

enacting section 83(c)(1).         Systemed's retention of the Right was

conditioned on its continued performance of substantial services

under   the   Contract     until   a   third   party   offered   to   purchase

Chalmette General.       So, under section 83(c)(1), Systemed held the

Right   subject   to   a   substantial     risk   of   forfeiture     until   it

relinquished the Right in exchange for $1.5 million from Qualicare.



     Thus, we conclude that the Tax Court properly held that, in

1983, the $1.5 million that Systemed received from Qualicare "is

compensation under section 83."



B. SECTION 337



     The Tax Court did not consider Systemed's contention that,

even if the payment that Systemed received from Qualicare is

taxable under section 83, section 337, as it existed in 1983,

allowed Systemed to refrain from recognizing the payment on its

1983 corporate tax return.             We consider and reject Systemed's

contention.
       In 1983, section 337(a) provided that:

       If, within the 12–month period beginning on the date on which
       a corporation adopts a plan of complete liquidation, all of
       the assets of the corporation are distributed in complete
       liquidation, less assets retained to meet claims, then no gain
       or loss shall be recognized to such corporation from the sale
       or exchange by it of property within such 12–month period.


26 U.S.C. § 337(a). Systemed claims that this language governs its

disposal of the Right.              But the Supreme Court recognizes that

section 337 does not absolutely free a corporation "from tax on

gains whenever it decides to liquidate."               Central Tablet Mfg. Co.

v. United States, 417 U.S. 673, 691, 94 S.Ct. 2516, 2526, 41

L.Ed.2d 398 (1974).



       In    Hillsboro   Nat'l      Bank   v.    Commissioner,   460    U.S.   370,

397–402, 103 S.Ct. 1134, 1150–53, 75 L.Ed.2d 130 (1983), the Court

traces the development of the rationale supporting section 337.

The statute has its origin in General Util. & Operating Co. v.

Helvering, 296 U.S. 200, 206, 56 S.Ct. 185, 187, 80 L.Ed. 154

(1935), where the Court established the doctrine that a corporation

need       not   recognize   gain    on    the   distribution    of    appreciated

corporate property to its shareholders.                Congress codified this

doctrine as section 336 of the 1954 Internal Revenue Code.2                    After

considering the legislative history of section 336, the Court

concluded that


       the real concern of the provision is to prevent recognition of

       2
      In 1983, section 336 provided, with exceptions not relevant
here, "no gain or loss shall be recognized to a corporation on
the distribution of property in partial or complete liquidation."
26 U.S.C. § 336 (1976 ed., Supp. V).
     market appreciation [of each corporate asset] that has not
     been realized by an arm's-length transfer to an unrelated
     party rather than to shield all types of income that might
     arise from the disposition of an asset.

Hillsboro, 460 U.S. at 398, 103 S.Ct. at 1151.            The Court then

considered   how   other   courts   have   interpreted   section   336   in
                                                          3
conformity with its "market appreciation" purpose:


     Even in the absence of countervailing statutory provisions,
     courts have never read the command of nonrecognition in § 336
     as absolute. The "assignment of income" doctrine has always
     applied to distributions in liquidation.        That judicial
     doctrine prevents taxpayers from avoiding taxation by shifting
     income from the person or entity that earns it to someone who
     pays taxes at a lower rate. Since income recognized by the
     corporation is subject to the corporate tax and is again taxed
     at the individual level upon distribution to the shareholder,
     shifting of income from a corporation to a shareholder can be
     particularly attractive: it eliminates one level of taxation.
     Responding to that incentive, corporations have attempted to
     distribute to shareholders fully performed contracts or
     accounts receivable and then to invoke § 336 to avoid taxation
     on the income. In spite of the language of nonrecognition,
     the courts have applied the assignment-of-income doctrine and
     required the corporation to recognize the income.

Id. at 398–99, 103 S.Ct. at 1151 (citations and footnotes omitted).


     The Court then explained how section 337 evolved from the

Helvering doctrine that became section 336.         In Commissioner v.

Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981 (1945),

the Court held that, if a corporation plans the sale of its assets

and distributes the assets to its shareholders as part of its

liquidation, then, when the shareholders sell the assets according

to the corporation's plan, the proceeds are taxable to both the


     3
      The Court later stated that "Congress did not intend to
allow corporations to escape taxation on business income earned
while carrying on business in the corporate form; what it did
intend to shield was market appreciation." Hillsboro, 460 U.S.
at 401, 103 S.Ct. at 1152.
corporation and the shareholders.     Id. at 334, 65 S.Ct. at 708.

But in United States v. Cumberland Pub. Serv. Co., 338 U.S. 451, 70

S.Ct. 280, 94 L.Ed. 251 (1950), the Court held that if the

shareholders negotiate the sale of corporate assets upon the

corporation's liquidation, the corporation may escape tax on gains

from those sales.   The Court stated that, "[w]hile the distinction

between sales by a corporation as compared with distribution in

kind followed by shareholder sales may be particularly shadowy and

artificial when the corporation is closely held, Congress has

chosen to recognize such a distinction for tax purposes."   Id. at

454–55, 70 S.Ct. at 282. Congress enacted section 337 to eliminate

the confusion wrought by the distinction that evolved from Court

Holding and Cumberland.   "The very purpose of § 337 was to create

the same consequences as § 336" if the corporation, rather than the

shareholders, sold its assets while executing a plan of liquidation

instead of distributing them directly to the shareholders, so "the

two provisions ... should be construed in tandem."   Hillsboro, 460

U.S. at 400–401, 103 S.Ct. at 1152.



     The Court's endorsement of the assignment-of-income doctrine

as an exception to section 336 and the Court's conclusion that

sections 336 and 337 must be construed in tandem require us to

reject Systemed's section 337 argument.      Under section 83(b),

Systemed could have elected to value the Right in 1975 and pay

taxes then on this aspect of its compensation under the Contract.

Then section 337 would have protected Systemed from tax on any

market appreciation of the Right.     Instead, Systemed waited to
dispose of the Right for value until after it declared a plan of

liquidation under section 337.                This is exactly the conduct that

the        Court   in    Hillsboro        understood    to    fall    within    the

assignment-of-income doctrine.                Systemed attempts to shift income

that Systemed earned to its shareholders to avoid one level of tax.

Like the courts in Midland–Ross Corp. v. United States, 485 F.2d
                                  4
110, 119 (6th Cir.1973)               and Commissioner v. Kuckenberg, 309 F.2d

202, 205 (9th Cir.1962), cert. denied, 373 U.S. 909, 83 S.Ct. 1296,

10    L.Ed.2d      411   (1963)       which   refused   to   permit   section   337

nonrecognition of proceeds that are attributable to corporate

efforts but collected during liquidation, we think that Systemed

       has performed the services which create the right to the
       income which brings into play the basic rule that income shall
       be taxed to him who earns it. Helvering v. Eubank, 1940, 311
       U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81.


Because the Right was compensation to Systemed under section 83 and

Systemed did not pay tax on that corporate-earned income before

declaring its liquidation, Systemed's attempt to avoid the tax now

under section 337 is thwarted by the assignment-of-income doctrine.



       The Tax Court's judgment is AFFIRMED.




       4
      We adopt the Midland–Ross court's analysis of why the
assignment-of-income doctrine limits section 337's definition of
property without repeating that analysis here. See Midland–Ross,
485 F.2d at 114–118.
