## Facts

- National Building Corporation (“National”), a closely held Michigan corporation, owned commercial real estate, including the Pantlind Hotel in Grand Rapids, acquired in 1951.
- National’s stock was held by three family groups, including the Honigman family (35%); family representatives served as officers and directors.
- In early 1963, National began steps toward a complete liquidation and sought to sell assets in a sequence intended to recognize a loss on the hotel before recognizing gains on other assets.
- National unsuccessfully attempted to sell the hotel at offering prices substantially higher than $50,000 over its existing $590,000 mortgage; the $50,000 over-mortgage price was not previously offered to outsiders.
- At an informal directors’ meeting in April 1963, Jason Honigman proposed a “nominal” sale price of $50,000 over the mortgage; another shareholder declined to purchase at that price, and Honigman proceeded.
- A new corporation, Pantlind Hotel Corporation, wholly owned by Jason Honigman’s wife, Edith Honigman, was formed to acquire the hotel.
- The purchaser acquired the hotel in May 1963 by assuming the mortgage and paying additional amounts (including cash and taxes), while National’s adjusted basis in the property was approximately $1,486,000.
- In August 1963, National adopted a plan of complete liquidation, sold remaining assets within one year, and distributed proceeds pro rata in a transaction qualifying for liquidation treatment.
- The Honigmans reported no dividend income from the hotel transaction; National claimed a large ordinary loss on the sale.
- The Commissioner determined that the below-market transfer produced a constructive dividend to the Honigmans equal to the bargain element (fair market value minus consideration) and correspondingly limited National’s recognized loss.
- The Tax Court largely sustained the Commissioner on these points; both sides appealed on different issues.

## Issues

1. Whether National’s transfer of the hotel to a corporation wholly owned by a shareholder’s spouse for less than fair market value resulted in a constructive dividend to the shareholder equal to the bargain element.
2. Whether National’s loss on the transaction was limited because the bargain element was treated as a distribution rather than part of a pure sale.
3. Whether the Tax Court erred on a separate, unrelated issue raised by the Commissioner in a cross-appeal.

## Decision

- The Sixth Circuit affirmed the Tax Court on the taxpayers’ appeal.
- The court held that the bargain element in the below-market transfer constituted a constructive dividend to the shareholder.
- The court held that National’s deductible loss was limited to the portion of the transfer treated as a sale for adequate consideration, not the portion treated as a distribution.
- The court reversed on the Commissioner’s cross-appeal as to an unrelated issue.

## Legal Principles

- Tax consequences follow the substance of a transaction, not its formal characterization as a “sale.”
- When a corporation transfers property to a shareholder (or a related person/entity) for less than fair market value, the difference between fair market value and the consideration paid is a constructive dividend to the shareholder to the extent of the corporation’s earnings and profits.
- A constructive dividend can arise even if the shareholder is not a majority owner; the focus is whether the corporation conferred a non-pro rata economic benefit without adequate consideration.
- If a bargain element is treated as a distribution, the corporation cannot claim a loss deduction on that portion as if it were sold at arm’s length.

## Conclusion

The Sixth Circuit treated National’s below-market transfer of the Pantlind Hotel to a corporation owned by a shareholder’s spouse as part sale and part distribution: the bargain element was taxable to the shareholder as a constructive dividend (to the extent of earnings and profits), and National’s loss deduction was correspondingly limited; the court otherwise reversed only on an unrelated cross-appeal issue.


Honigman v. Comm’r, 466 F.2d 69 (6th Cir. 1972)