Erwin G. Baumer and Clara S. Baumer, Cross-Appellants v. United States of America, Seven Eighty-Eight Greenwood Avenue Corporation v. United States

This appeal presents a novel variation of the recurrent problem of determining the tax consequences of transactions between closely held corporations and their shareholders. Here a corporation granted an option to purchase a one-half interest in a parcel of real estate to the son of the corporation's sole shareholder for nominal consideration. In the proceedings below, the district court held that the grant of this option resulted in a constructive dividend from the corporation to the father, measured by the ascertainable value of the option.

The government argues on appeal that the option was simply a device for shifting to the son half of the corporation's gain on the subsequent sale of the property to a third party purchaser. Accordingly, for federal tax purposes the option itself should be ignored and the transaction treated as a sale of the entire property by the corporation to the ultimate purchaser accompanied by the distribution of a constructive dividend to the father. The government contends that the value of this dividend should be the difference between the price paid by the son to exercise the option (the "exercise price") and the actual fair market value of the property interest acquired by the son. In the alternative, the government argues that even if the district court correctly held that no tax is owed by the corporation and that the grant of the option, rather than the sale of the property to son, gave rise to the constructive dividend to the father, the court erred in its valuation of the benefit conferred by the option.

The father, son, and corporation ("taxpayers") cross appeal from the judgment of the district court. They maintain that the option was granted to the son in an arm's-length transaction and that the district court erred in treating the option as a constructive dividend by the corporation to the father.

We find that the record supports the district court's conclusion that the grant of the option constituted neither an arm's-length transaction, on the one hand, nor an illusory event designed to shift the corporation's gain on the ultimate sale of the property to the son on the other. On these issues we affirm the decision of the district court. However, treating the grant of the option itself as a constructive dividend, we substantially agree with the government that the district court erred in its valuation of the benefit conferred on the son. We therefore remand the actions involving the son and the father for redetermination of the value of the constructive dividend.

The facts of this case are largely undisputed, although the proper characterization of these facts is far from clear. Taxpayer Erwin G. Baumer ("Father") is the father of taxpayer Erwin H. Baumer ("Son"), and, during the period in question, was the sole shareholder of taxpayer Seven Eighty-Eight Greenwood Avenue Corporation ("Corporation"), a Georgia corporation which owned and leased real estate in the Atlanta, Georgia area.1 Son is a real estate attorney. In early 1965, Son became interested in purchasing a parcel of residential property on Piedmont Road in Atlanta. In November, 1965, Son was offered the Piedmont property for $175,000. Father, who was knowledgeable about property in the area, advised Son not to accept the offer.2 Son followed this advice.

Shortly thereafter, in January, 1966, Father was advised that an attractive investment property on Piedmont Road was for sale. This turned out to be the same property that Son had been interested in just a few months earlier. Corporation accepted an offer to purchase the property for $174,000 in late January, 1966. The property was then zoned for residential use.

The district court found that the value of the Piedmont property for residential use was somewhat less than $175,000, but noted that at the time of the purchase, the neighborhood was ripe for transition to commercial use. While the court could not determine whether the actual fair market value of the property was in excess of $175,000, it did find that the realization of any potential value in excess of $175,000 depended upon favorable rezoning to commercial uses.

When Father informed Son of this transaction, Son requested that the Corporation sell him an interest in the property. Father agreed, and the Board of Directors authorized Corporation to sell Son a one-half interest in the property. Father testified that he made this offer because he had originally advised Son against purchasing what Father later considered to be an attractive investment property. Subsequently, the proposed transaction was modified and a written option was executed by Corporation and accepted by Son in early May, 1966. The exercise price of the option for purchase of a one-half interest in the property was set at $88,000, approximately one-half interest of the corporation's cost basis, plus 51/2 percent interest calculated from the effective date of the option, February 7, 1966.3 The stated term of the option was one year from the effective date. The option was exercisable immediately and without conditions, and the option privilege was assignable by Son. The stated consideration for the option privilege was $10.00, which Son did not recall actually paying.

The district court found that Father and Son intended to use the Piedmont property to develop a motel. Son, who had substantial legal experience in zoning matters, began investigating the possibility of rezoning the property for commercial use. Upon discovering that the property could not be rezoned unless sewer services were provided, Son located an adjacent parcel of real estate on Old Ivy Road which had access to sewer facilities. According to the district court's findings, Son's efforts were inspired by the fact that "he considered that he had an interest in the property." In August, 1966, Corporation purchased the Old Ivy property for $25,000.

Because of this purchase, the combined properties became eligible for rezoning to a commercial classification. Consequently, the value of the Piedmont property was substantially increased. On January 12, 1967, approximately one month prior to the termination of the original options, the corporation granted Son an amended option which covered both the Piedmont and Old Ivy properties; set a new exercise price of $100,000, approximately one-half of Corporation's purchase price for the two properties, plus 51/2 percent interest; and extended the period during which the option could be exercised until June 30, 1969. The amendment further provided that the option privilege was assignable by Son. The stated consideration for these modifications was $10.00, which Son did not recall having paid.

In January 1967, Pope & Carter Co., Inc. ("Pope & Carter"), an Atlanta real estate brokerage company, informed Father that it was interested in purchasing the Piedmont-Old Ivy property. After negotiations participated in by Father, Son, and Pope & Carter, Corporation granted Pope & Carter an option to purchase the combined properties. This option, which took effect on January 25, provided in relevant part that: (1) Pope & Carter was required to expend reasonable time and effort to obtain favorable C-1 zoning, which would permit motel use; (2) the option would remain open for six months without the payment of a cash consideration and could be extended for up to six additional months by paying Corporation $3,000 per month; (3) the option purchase price was $500,000; (4) any option extension payments were to be applied against the purchase price; and (5) the option was assignable. Pope & Carter was aware of Son's interest in the property when it negotiated this option.

Pursuant to its obligations under the option, Pope & Carter expended substantial time and money to obtain the desired zoning. The results were encouraging and beginning in July, 1967, Pope & Carter exercised its right to purchase monthly extensions on its option. At the end of the one year option period, the Pope & Carter option was extended from January 24, 1968 through April 24, 1968 for a consideration of $1,000 per month. From April 24, 1968 through December 27, 1968, additional extensions were granted for the nominal consideration of $1 per month "in view of the impending favorable zoning action."

On December 4, 1968, Pope & Carter's rezoning application was approved,4 with certain conditions, with respect to the Piedmont property. The Old Ivy property was not rezoned. Two days later, Son exercised his amended option on the Piedmont-Old Ivy properties. On December 18, Son purchased a one-half undivided interest in the properties and tendered to Corporation a note for $114,501.23, bearing interest at 61/2 percent. Nine days later, on December 27, Pope & Carter exercised its option to purchase the properties. The district court found that the fair market value of the properties at that time at least equalled Pope & Carter's exercise price of $500,000. The sale was closed on July 1, 1969, with an assignee of Pope & Carter actually making the purchase.

Son received $252,700 for his interest in the properties. Most of this sum was payable in installments by Pope & Carter's assignee, Crow, Pope & Carter Construction Co. Son's note to Corporation was subsequently modified to provide for payment coinciding with these installments. The purpose of this modification was to permit Son to use the payments he would receive from Pope & Carter's assignee to satisfy the obligations arising from his purchase of the property.

On its federal tax return for the fiscal year ending November 30, 1969, Corporation reported a sale to Son of a one-half interest in the combined properties, showing no gain on this transaction. Corporation also reported a sale to Pope & Carter's assignee of its second one-half interest in the combined properties. On this transaction, Corporation reported a gain of one-half of the difference between its purchase price of the properties and the approximately $500,000 option purchase price paid by Pope & Carter's assignee. Son reported on his 1969 income tax return a sale of one-half interest in the Piedmont-Old Ivy properties and a gain thereon valued at the difference between his own option price and one half the amount paid by Pope & Carter's assignee for the property. Father reported no income on any of these transactions.

The Commissioner concluded that this option transaction constituted a device for transferring half of Corporation's gain on the properties at issue to Son and, accordingly, assessed additional taxes based on the determinations (1) that Corporation should be taxed on the entire gain from the sale to Pope & Carter's assignee and (2) that Father received a constructive dividend on Son's exercise of his option in 1968 and that such dividend was taxable to Father in the amount of the difference between the "bargain price" paid by Son on exercise of his option and the fair market value of the property as reflected by the Pope & Carter sale.5 Taxpayers paid the resulting deficiencies and instituted these refund proceedings in the district court.

The district court rejected the government's contention that the option was merely a device for transferring Corporation's gain on the sale of the properties to Son. Accordingly, the court held that Corporation was not liable for the gain on the sale of Son's interest in the properties. The court also rejected, however, the taxpayers' position that the grant of the option to Son was an arm's-length transaction. The court found that the grant of the option, and its amendment, constituted distributions in 1966 and 1967 of corporate property resulting in a dividend to Father and a gift by him to Son. These distributions "were without consideration and by virtue of Father's position as sole shareholder of the corporate plaintiff." Finding the value of the distributions to be indeterminable in 1966 and 1967, the court applied the "open transaction" doctrine of Burnet v. Logan, 283 U.S. 404, 51 S.Ct. 550, 75 L.Ed. 1143 (1931), to defer recognition of the gain and consequent tax liability until 1968. The court then valued the Son's option with reference to the $3,000 per month consideration paid by Pope & Carter for monthly extensions of its option.6

The government now appeals from the district court's judgment. It maintains that the district court erred in not treating the option as a sham. Thus according to the government, the entire gain from the sale to Pope & Carter's assignee is taxable to Corporation. Since half of that gain was distributed to Son by means of the option sale of corporate property at a price far below the market value, Father should be liable for a constructive dividend of that amount. Alternatively, the government asserts that the tax consequences to Father are the same even if the district court is correct in holding that no tax is owed by Corporation and that it was the grant of the option, and not the "bargain sale" of the property to Son, that gave rise to a constructive dividend. According to the government, the district court erred in valuing the option with reference to the Pope & Carter option and under the open transaction doctrine, the value of the option should be determined by the spread between the option price and the fair market value of the property acquired at the time of exercise.7

Taxpayers cross appeal from the district court's conclusion that the grant of the option to Son resulted in a constructive dividend to Father, arguing that the option was granted in an arm's-length transaction. Taxpayers also maintain that even if the grant of the option to Son was a taxable event, the resulting dividend to Father occurred in 1966 or 1967, years which are not in issue in these proceedings.

We first examine the government's contention that the sale by Corporation to Son of a one-half interest in the property immediately prior to the exercise of the Pope & Carter option was a sham transaction designed to shift half of Corporation's gain on that impending sale to Son. The government maintains that under the doctrine of Commissioner v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981 (1945),8 the district court should have taxed the Corporation on the entire gain from the sale to Pope & Carter.9

Our consideration of whether the entire gain from the sale to Pope & Carter should have been imputed to Corporation must begin with an analysis of Court Holding, supra, the principal Supreme Court pronouncement in this area. There the corporation had orally agreed to sell its only asset, an apartment house, to a third party purchaser. Subsequently, the corporation learned of the double tax that would arise if it first sold the property and then distributed the proceeds of the sale to its shareholders. The corporation therefore refused to finalize the sale and instead distributed the property to its shareholders, who in turn sold it to the same third party purchaser on the same terms negotiated by the corporation. The Tax Court found that in reality the sale was made by the corporation in performance of the prior agreement and attributed the gain to the corporation. The Fifth Circuit reversed, disagreeing with the Tax Court's findings, and the Supreme Court reversed the Fifth Circuit, holding that the findings of the Tax Court was supported by the evidence. The Court stated:

(T)he transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant. A sale by one person cannot be transformed into a sale by another by using the later as a conduit through which to pass title. 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.

The Supreme Court next considered the imputed income rule in United States v. Cumberland Public Service Co., 338 U.S. 451, 70 S.Ct. 280, 94 L.Ed. 251 (1950). In that case the shareholders of a corporation desired to liquidate their holdings, but their offer to sell their stock to a competitor was rejected. The competitor countered with an offer to buy the corporation's assets. The corporation, however, turned down this offer, and the shareholders of the corporation instead offered to acquire the assets from the corporation and to sell them to the competitor in their individual capacities, thereby avoiding capital gains treatment for the corporation. The Commissioner attributed the gain from the sale to the corporation, but the Court of Claims refused to impute this gain to the corporation, finding as a factual matter that the sale had been made by the shareholders. The Supreme Court affirmed, placing great emphasis on the fact that the liquidation and dissolution of the corporation genuinely ended its activities and existence. The Court also stressed, however, the importance of the lower court's finding that the sale in question was made by the shareholders rather than by the corporation itself.

We had occasion to analyze the Court Holding and Cumberland cases in Hines v. United States, 477 F.2d 1063 (5th Cir. 1973). In Hines we concluded that a basic principle established by the Supreme Court was that "the proceeds of the sale of property distributed by a corporation to its shareholders should be imputed to the corporation Only if the sale was in fact made by the corporation, not by the shareholders." 477 F.2d at 1069 (emphasis supplied). The touchstone for this determination is whether the corporation Actively participated in the sale that produced the income to be imputed:

"(T)he Sine qua non of the imputed income rule is a finding that the corporation actively participated in the transaction that produced the income to be imputed. Only if the corporation in fact participated in the sale transaction, by negotiation, prior agreement, postdistribution activities, or Participated in any other significant manner, could the corporation be charged with earning the income sought to be taxed." 477 F.2d at 1069-70 (emphasis in original).

In applying this standard, the courts have recognized that there are a potentially unlimited number of variations and permutations of transfers raising the Court Holding issue. The characterization of a particular transaction as "real or a sham," Cumberland, supra, 70 S.Ct. at 282, depends in large measure on a subjective judgment based on the special facts of each case. No appellate court, no matter how ingenious, can devise a simple, mechanical formula which will reveal the "correct" characterization of the transaction at issue in every instance. As the Court held in Cumberland, "(i) t is for the trial court, upon consideration of the entire transaction, to determine the factual category in which a particular transaction belongs. Here as in the Court Holding Co. case we accept the ultimate findings of fact of the trial tribunal." 70 S.Ct. at 282-83.

In the instant case, the district court concluded that the government's Court Holding theory was "inapplicable to the factual situation presented in this case," finding that the distribution of the option to Son occurred before a sale of the property was even contemplated,11 that Son was personally involved to a substantial extent in the development activity which led to the increased value of the Piedmont-Old Ivy properties,12 and that Son negotiated with Pope & Carter in his own behalf with respect to his interest in the properties.13 These findings must be accepted unless clearly erroneous. Hines v. United States, supra, 477 F.2d at 1071 n. 11.14 Our review of the record convinces us that there is ample evidence to support the court's factual determinations. We therefore affirm the court's judgment that this transaction was not stricken by Court Holding's selling virus.

In so holding we are not unaware of certain doubts raised by the government concerning the economic reality of the transactions between Corporation and Son. The government correctly notes that the corporation bore all the risks with respect to the zoning action, which was necessary to make the purchase a profitable venture. Son did not actually exercise his option and acquire title to the property until favorable zoning was obtained and the sale to Pope & Carter became a virtual certainty. Furthermore, Corporation actively participated in the negotiations with Pope & Carter which led to the sale of the Piedmont-Old Ivy properties. Son never expended a single cent on the transaction, either in acquiring the option or in exercising it. Indeed, the note Son gave Corporation as payment for the properties was modified shortly after its execution to allow a pass through to Corporation of Pope & Carter's payments to Son. The government further argues that, as a matter of law, the options granted by Corporation to Son were merely continuing offers to sell which did not transfer a present property interest to Son. Were this the case, no property interest would have been transferred from Corporation to Son until after the agreement with Pope & Carter was negotiated and virtually consummated by Corporation. To the extent Son participated in the negotiations before the sale from Father to Son, his activities would have been on behalf of Corporation since Son would have had no interest of his own. In such circumstances, a finding that the sale of Son's interest to Pope & Carter's assignee was made by Son, rather than by Corporation, would be difficult, if not impossible, to support.

The critical link in this chain of reasoning by the government is its legal argument that the option is invalid under state law for lack of consideration. We disagree. In Smith v. Wheeler, 233 Ga. 166, 210 S.E.2d 702 (1974), the Supreme Court of Georgia held that an option to buy real estate was binding on the optionor even though the optionee failed to deliver the one dollar recited in the contract as the sole consideration for the option. The Court reasoned that the recital to pay a nominal consideration gives rise to an implied promise to pay which can be enforced by the other party. The government attempts to distinguish Smith on the ground that the instant case involves an intra-family transaction while in Smith the Georgia Court was confronted with an arm's-length agreement struck by unrelated individuals. We can discern no basis for such a distinction under state law. Related individuals are free to enter into binding contracts, and we have found no Georgia cases holding that different rules govern the validity and enforceability of a contract where related individuals are involved. Here the option agreement was formalized in writing and signed by both parties. Under Georgia law, the recitation of nominal consideration having been paid by the optionee is sufficient to bind the optionor.15

Notwithstanding our rejection of the government's legal position that a grant of an option by a closely held corporation to a shareholder for nominal consideration cannot transfer a property interest, we concede that the factors discussed by the government raise doubts concerning the district court's factual characterization of the transaction.

Nonetheless, there is other evidence in the record which supports the district court's findings and conclusions. Under the standard applied by this Court in Hines v. United States, supra, the critical factual question is whether Corporation "actively participated in the transaction that produced the income to be imputed." 477 F.2d at 1069 (emphasis supplied). Application of this standard in the case at bar is complicated by the fact that both Son and Corporation had interests in the property. In the more typical situation, such as that presented in Hines, the entire property is transferred to the shareholder. In such a case, any participation by the corporation in negotiating the sale of the property after that property is distributed to the shareholder evidences a sale by the corporation, rather than the shareholder. Here, however, Corporation retained a one-half interest in the property. It is absurd to suggest that income may be imputed to the corporation simply because it negotiated with third parties concerning this disposition Of its own interest In the property. Instead, the crucial question becomes whether the Corporation "actively participated" in the sale of Son's share of the property. This is a question of fact, and proper deference must be given to the findings of the district court. The district court found in this regard that Father negotiated with Pope & Carter "on behalf of the Corporation" and that Son negotiated "on his own behalf." See footnote 13 Supra. This finding is itself supported by the record and is further supported by two subsidiary findings indicating the reality of Son's interest in the property.

The court found that at the time the option was granted, Father and Son intended to use the property themselves "for a motel." This finding, supported by evidence in the record, indicates that no sale of the property was contemplated when Son received the property interest reflected by the option. This, in turn, supports the conclusion that the option was not merely a subterfuge designed to conceal Corporation's subsequent sale of the entire property, but instead was intended to pass an interest to Son which Son, and not Corporation, later disposed of in the sale to Pope & Carter.

The court's determination that Son, rather than Corporation, negotiated with respect to Son's interest in the property is further supported by evidence that Son was personally involved to a substantial extent in the development activity which led to the increased value of the properties. The district court found that these efforts were attributable to Son's belief that he had an interest in the property.16 The fact that Son had previously treated the option as constituting a personal property interest and had relied on this personal interest in developing the Piedmont-Old Ivy tracts strongly suggests that when Son later participated in the negotiations with Pope & Carter, he also did so in his own behalf. The prior treatment of a transaction by the parties is a relevant consideration, which in this case, supports the finding that Son, and not Corporation, negotiated with Pope & Carter with respect to Son's interest in the property.

In sum, we are not persuaded that the transactions at issue must necessarily be characterized as a sham, as less than Bona fide, or as, "in substance," a sale by Corporation. There was evidence in the record to support the findings that Son received his option interests before a sale was contemplated, that the option was treated by all the parties as a meaningful property interest, and that the option was the impetus for Son's personal efforts which significantly contributed to the appreciation in value of the property. These findings, plus other evidence in the record, supports the findings that Son, not Father, negotiated with Pope & Carter in his own behalf with respect to the sale of Son's interest in the property and that Corporation did not actively participate in the sale of Son's interest. While perhaps we might have characterized these transactions differently had we been responsible for the initial factual determination, in our role as an appellate court we may not impinge on the district court's fact-finding prerogatives. The factors outlined above provide a sufficient basis for the court's conclusion that the sale of Son's interest in the property was not the sale of Corporation. Accordingly, we affirm the court's decision not to impute income from that sale to Corporation under the Court Holding rationale.

We wish to make clear that we have not ignored the government's argument that this decision will enable closely held corporations to avoid Court Holding by granting options to their shareholders on every piece of corporate property, thereby avoiding corporate tax if the property is later sold. This argument, however, does not persuade us that the result urged by the government is required in this case. In this area of tax law, each case will necessarily turn on its own particular facts. Evidence that a corporation has distributed hundreds of options to its shareholders would clearly be relevant to the district court's evaluation of an option transaction before it. We emphasize that where the district court correctly applies the proper legal standard, the characterization of a transaction as, in substance, a sale by the corporation or a sale by the shareholder rests on findings of fact which are within the province of the district court. The district court's determinations must be accepted on appeal where the factual findings are not clearly erroneous. To reiterate, "(i)t is for the trial court, upon consideration of the entire transaction, to determine the factual category in which a particular transaction belongs." United States v. Cumberland Public Service Co., supra, 70 S.Ct. at 282-83. Nothing in today's opinion is meant to preclude the trial court from imputing income to a corporation where the record indicates that, in reality, the option at issue is merely a sham device for transmogrifying what is truly a corporate sale into a sale nominally made by the shareholders.

At a more fundamental level, the government's argument fails to recognize the limited scope of the Court Holding doctrine. The Supreme Court in Cumberland affirmed the factfinder's characterization of the transaction at issue even though that transaction was designed solely to avoid double taxation of corporate gains. In Hines v. United States, supra, we held that income need not be imputed even though the transfer was made "in anticipation of a sale by the shareholders, and . . . with no valid business purpose aside from motives of tax avoidance." 477 F.2d at 1069, 1070. As the Supreme Court stated in Cumberland :

Congress having determined that different tax consequences shall flow from different methods by which the shareholders of a closely held corporation may dispose of corporation property, we accept its mandate.

70 S.Ct. at 282.

Thus where corporate property is distributed to a shareholder pursuant to a valid option, and the sale of that property is, in reality, negotiated and consummated by the shareholder rather than by the corporation, the courts are not permitted to impute the income from that sale to the corporation. Just as we may not inoculate transactions infected by the Court Holding selling virus, we may not allow that virus to reach epidemic proportions in response to the government's lamentations that its coffers are ailing and ill-nourished. Such

decisions are best left to Congress. III. The Option:

Arm's-Length Transaction or Constructive Dividend?

Our conclusion that income from the sale of Son's interest in the Piedmont-Old Ivy property is not imputable to Corporation under Court Holding requires us to examine the government's alternative theory that the ascertainable value of property conferred by Corporation on Son without adequate consideration is taxable to Father as a constructive dividend.17 The district court substantially agreed with this theory and held that Father received a constructive dividend when Corporation granted the option to Son in 1966 and amended it in 1967. However, finding that the value of the option was not ascertainable in 1966 or 1967, the court deferred recognition of the dividend and liability for the tax until Son exercised his option in 1968. The court then valued the option with reference to the consideration paid by Pope & Carter for monthly extensions of its option.

Our review of the court's holding involves several district inquiries. In subsection III(A) we discuss why, as a general matter, the district court was correct in refusing to assume at once that a transaction between a corporation and the sole shareholder's son was an arm's-length transaction. We then consider in subsection III(B) whether constructive dividend treatment was warranted in this case. Finally, in subsection III(C) we examine the district court's valuation of the constructive dividend.

We note at the outset that our journey through the constructive dividend area of tax law is a difficult one, often with no clear precedents to guide our way. In seeking to divine congressional intent, we must view the Code as a coherent whole, gleaning whatever rules and policies it may offer for deciding the issues before us. We attack these issues with a full arsenal of judicial weapons, including our own precedents, the Treasury Regulations, the Code sections which apply directly and those which indicate congressional purpose by analogy.

A. Judicial Scrutiny of Transactions Between Closely Held Corporations and Their Shareholders: A General Discussion

We begin by considering taxpayers' contention that the option to Son was granted by Corporation at a fair price in an arm's-length transaction. According to taxpayers, no tax consequences should attach either to the grant or to the exercise of the option. In taxpayers' view, Son's option should be treated no differently than the option granted to Pope & Carter. We conclude that this argument is untenable. In order to elucidate our views on the oft-perplexing problem of the conferral of benefits on a controlling shareholder by a closely held corporation, we begin with first principles.

Distributions of "property" made by a corporation to a shareholder with respect to its stock are dividends to the extent of the corporation's current and accumulated earnings and profits, 26 U.S.C. §§ 301(a)(c),316(a),18 and must included by the shareholder in gross income. 26 U.S.C. §§ 301(a), 301(c) (1).19

For purposes of corporate distributions, the Code defines "property" as

money, securities, and other property; except that such term does not include stock in the corporation making the distribution (or rights to acquire such stock).

26 U.S.C. § 317(a). In accordance with this broad definition of property, dividends may be "in cash or in kind, and may also result when the corporation makes a 'bargain sale' of its property to the shareholder at less than fair market value. When there is a 'bargain sale,' the shareholder receives a dividend in the amount of the difference between the fair market value and the price paid for the corporate property . . . ." Green v. United States, 460 F.2d 412, 419 (5th Cir. 1972). As the Supreme Court has recognized, "a sale, if for substantially less than the value of the property sold, may be as effective a means of distributing profits among stockholders as the formal declaration of a dividend." Palmer v. Commissioner, 302 U.S. 63, 58 S.Ct. 67, 82 L.Ed. 50 (1937). No such formal declaration is required for a shareholder to be charged with a constructive dividend. Crosby v. United States, 496 F.2d 1384 (5th Cir. 1974).

Two other guiding principles require mention at this stage. It is clear that the intent of the parties does not govern the characterization of a distribution. Instead, courts have looked to the economic Effect of the transaction at issue in determining the existence of a dividend. See id; Loftin and Woodard, Inc. v. United States, 577 F.2d 1206, at 1214 (5th Cir. 1978). It is also well settled that a dividend does not escape taxation "simply because it fails to pass through the hands of the particular taxpayer when . . . the dividend is diverted at the behest of the shareholder into the hands of others." Green v. United States, supra, 460 F.2d at 419, Quoting Sammons v. United States, 433 F.2d 728, 730 (5th Cir. 1970), Cert. denied, 402 U.S. 945, 91 S.Ct. 1621,