                           NOT FOR PUBLICATION

                    UNITED STATES COURT OF APPEALS
                                                                           FILED
                           FOR THE NINTH CIRCUIT
                                                                            JUL 12 2017
J. MICHAEL BELL; SANDRA L. BELL,                 No. 16-70165           MOLLY C. DWYER, CLERK
                                                                         U.S. COURT OF APPEALS


              Petitioners-Appellants,            Tax Ct. No. 11917-12

 v.
                                                 MEMORANDUM*
COMMISSIONER OF INTERNAL
REVENUE,

              Respondent-Appellee.



MBA REAL ESTATE, INC.,                           No. 16-70166

              Petitioner-Appellant,              Tax Ct. No. 11918-12

 v.

COMMISSIONER OF INTERNAL
REVENUE,

              Respondent-Appellee.


                            Appeal from Decisions of the
                              United States Tax Court




      *
        This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
                             Submitted July 10, 2017**
                             San Francisco, California

Before: GRABER and FRIEDLAND, Circuit Judges, and GUILFORD,*** District
Judge.

      Petitioners J. Michael Bell, Sandra Bell, and MBA Real Estate, Inc.

("MBA"), appeal the tax court’s decisions assessing deficiencies in income tax due

for taxable years 2008, 2009, and 2010. We affirm.

      In 2008, newly formed MBA purchased all assets—primarily real-estate

owned ("REO") contracts—from Mr. Bell’s sole proprietorship for $225,000, to be

paid in monthly installments of $10,000, at 10% interest. The tax court held that

the tax treatment of that transaction was governed by 26 U.S.C. § 351(a), which

applies when "property is transferred to a corporation by one or more persons

solely in exchange for stock in such corporation." Petitioners assert that the court

erred because the Bells received a contractual right to $225,000, not "stock."

Petitioners therefore urge us to hold that the transaction is governed by § 351(b),

which applies when a person receives "other property or money."




      **
        The panel unanimously concludes that this case is suitable for decision
without oral argument. Fed. R. App. P. 34(a)(2).
      ***
         The Honorable Andrew J. Guilford, United States District Judge for the
Central District of California, sitting by designation.
                                          2
      Title 26 U.S.C. § 385 defines the "[t]reatment of certain interests in

corporations as stock or indebtedness." Although a corporation may characterize a

transaction as creating indebtedness, that characterization is not binding on the

Secretary. Id. § 385(c)(1). Applying relevant factors—to be promulgated via

regulation—the Secretary of the Treasury must determine "whether an interest in a

corporation is to be treated for purposes of this title as stock or indebtedness (or as

in part stock and in part indebtedness)." Id. § 385(a). In other words, § 385

dictates whether Petitioners’ interest in the corporation—the contractual right to

collect $225,000—is "stock" for purposes of title 26.

      In Hardman v. United States, 827 F.2d 1409, 1411 n.1 (9th Cir. 1987), we

noted that the Secretary had yet to promulgate a regulation listing the applicable

factors. We therefore announced our own 11-factor test, synthesized from earlier

court decisions. Id. at 1411–12. We agree with the parties that those factors

determine the proper characterization of the transaction at issue here.1

      Having carefully considered the 11 factors, we hold that the tax court did not

clearly err in concluding that the contractual right to $225,000 was properly

      1
        The Secretary recently promulgated a regulation on point, but the
regulation does not apply here: "This section applies to taxable years ending on or
after January 19, 2017." 26 C.F.R. § 1.385-1(f). In any event, the new regulation
does not change the analysis because, going forward, the proper treatment of a
transaction "is determined based on common law, including the factors prescribed
under such common law." Id. § 1.385-1(b).
                                           3
viewed as "stock" and not "indebtedness." The transaction had many formal

indicia of a true sale, thus supporting a finding of indebtedness. But "[s]ubstance,

not form, controls the characterization of a taxable transaction," Hardman, 827

F.2d at 1411, and many factors support the tax court’s determination that the right

to $225,000 was properly viewed as "stock." MBA had no meaningful assets apart

from the REO contracts and no history of doing business. There was no security;

there was no promissory note; MBA had very little capital; MBA had no history of

repayment; and MBA’s sole non-trivial assets—the REO contracts—were

speculative. As the tax court correctly found, "[t]here is no evidence in the record

as to whether MBA would have been able to obtain a loan from a third party.

MBA was a newly organized, thinly capitalized business."

      The transaction at issue here differs in several important ways from the

transaction we addressed in Gyro Engineering Corp. v. United States, 417 F.2d 437

(9th Cir. 1969). First, in Gyro, the corporation issued "a series of negotiable

promissory notes," id. at 438, whereas here no such notes were issued. Second, the

purchased apartments in Gyro had a history of producing income, and that income

was sufficient to make all the necessary payments under the notes. Id. at 439.

Here, there was no meaningful history of payments under the REO contracts and

the contracts were speculative in nature. Third, unlike the REO contracts at issue


                                          4
here, the apartment buildings in Gyro had "self liquidating potential." Id. Fourth,

unlike the unknown and speculative cash value of the REO contracts, the parties in

Gyro had experts testify as to the "present cash value" of the apartment buildings,

and that value was approximately the same as the transaction amount. Id. at 440

n.5. Finally, unlike the lack of evidence in this record suggesting that a lender

would enter into a comparable agreement, the government’s expert in Gyro

"acknowledged that ‘the hypothetical average investor’ would have entered into

the agreement." Id. at 439–40.

      For those reasons, we hold that, under 26 U.S.C. § 385, the tax court

properly treated the contractual right to $225,000 as "stock" for purposes of title

26. Because the Bells received only "stock," § 351(a), and not § 351(b), governs

the tax treatment of the transaction.2

      AFFIRMED.


      2
        In urging us to hold that § 351(b) does not apply, the government advances
an outdated—and erroneous—argument that the contractual right is a "security"
and therefore not part of the "boot." See Gov’t’s Brief at 40–42 (citing cases from
1933, 1940, 1954, 1958, and 1978). The pre-1989 version of § 351 distinguished
between "stock or securities" on the one hand and "other property or money" on
the other hand. E.g., 26 U.S.C. § 351 (1988) (emphasis added). But in 1989,
Congress removed the "or securities" clause from § 351 in a section of the Public
Law titled "Securities Treated as Boot Under Section 351." Pub. L. No. 101-239,
§ 7203, 103 Stat. 2106, 2333 (1989). The government’s stale argument does not
affect our analysis because, under § 385, the contractual right to payment is
properly viewed as "stock."
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