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Stewart v. Nebraska Department of Revenue

Supreme Court of Nebraska

October 14, 2016

Brenton R. Stewart and Mary M. Stewart, appellants.
Nebraska Department of Revenue, an agency of the State of Nebraska, and Leonard J. Sloup, in his official capacity as acting tax Commissioner, appellees.

         1. Administrative Law: Judgments: Appeal and Error. A judgment or final order rendered by a district court in a judicial review pursuant to the Administrative Procedure Act may be reversed, vacated, or modified by an appellate court for errors appearing on the record.

         2. __:__: __. When reviewing an order of a district court under the Administrative Procedure Act for errors appearing on the record, the inquiry is whether the decision conforms to the law, is supported by competent evidence, and is neither arbitrary, capricious, nor unreasonable.

         3. Administrative Law: Statutes: Appeal and Error. To the extent that the meaning and interpretation of statutes and regulations are involved, questions of law are presented, in connection with which an appellate court has an obligation to reach an independent conclusion irrespective of the decision made by the court below.

         4. Statutes: Appeal and Error. Statutory language is to be given its plain and ordinary meaning, and an appellate court will not resort to interpretation to ascertain the meaning of statutory words which are plain, direct, and unambiguous.

         5. Statutes. It is not within the province of the courts to read a meaning into a statute that is not there or to read anything direct and plain out of a statute.

         6. Statutes: Legislature: Intent. In order for a court to inquire into a statute's legislative history, the statute in question must be open to construction, and a statute is open to construction when its terms require interpretation or may reasonably be considered ambiguous.

         [294 Neb. 1011] 7. Statutes. If the language of a statute is clear, the words of such statute are the end of any judicial inquiry regarding its meaning.

         8. Statutes: Legislature: Intent. The intent of the Legislature may be found through its omission of words from a statute as well as its inclusion of words in a statute.

         9. Statutes: Legislature: Presumptions. The Legislature is presumed to know the general condition surrounding the subject matter of the legislative enactment, and it is presumed to know and contemplate the legal effect that accompanies the language it employs to make effective the legislation.

         Appeal from the District Court for Lancaster County: Jeffre Cheuvront, District Judge, Retired.

          Tracy A. Oldemeyer and Andre R. Barry, of Cline, Williams, Wright, Johnson & Oldfather, L.L.R, for appellants.

          Douglas J. Peterson, Attorney General, and L. Jay Bartel for appellees.

          Heavican, C.J., Wright, Miller-Lerman, Cassel, Kelch, and Funke, JJ.

          Cassel, J.


         Two taxpayers sold their capital stock of a corporation and, in order to qualify for a special capital gains election, [1]structured the transaction to comply with the literal terms of a definitional statute.[2] The disallowance of the election was upheld below. In this appeal, we must decide whether either the "economic substance" doctrine or the "sham transaction" doctrine provided a basis to disallow the taxpayers' election. Because the statute is not open to interpretation and the plain language demonstrates that the Legislature intended to confer [294 Neb. 1012] this tax benefit, the answer is no. We reverse, and remand with directions the contrary decision below.


         In determining a resident taxpayer's liability for state income tax, the Nebraska Revenue Act of 1967[3] allows the taxpayer to make one election during his or her lifetime to exclude from federal adjusted gross income those capital gains from the sale of "capital stock of a corporation acquired by the individual (a) on account of employment by such corporation or (b) while employed by such corporation."[4] This exclusion is known as the special capital gains election.

         Brenton R. Stewart and Mary M. Stewart, both residents of Nebraska, attempted to make this election regarding their sales of capital stock in Pioneer Aerial Applicators, Inc. (Pioneer), to Aurora Cooperative Elevator Company (Buyer).

         Sale of Pioneer Stock

         On February 26, 2010, the Stewarts and the one other shareholder of Pioneer (collectively the Sellers) signed a contract to sell their combined shares of Pioneer to Buyer. The contract closing date was scheduled for March 1. Throughout this appeal, all of the parties before us have asserted that the closing date-March 1-is the relevant date. We limit our discussion accordingly.

         The structure of the sale was critical to the tax exclusion. Without additional shareholders, the sale was not eligible for the special capital gains election because, otherwise, Pioneer was not a qualified corporation. A qualified corporation is one that

at the time of the first sale or exchange for which the election is made, [has] (i) at least five shareholders and (ii) at least two shareholders or groups of shareholders [294 Neb. 1013] who are not related to each other and each of which owns at least ten percent of the capital stock.[5]

         Before the agreement was made, Pioneer had only three shareholders. Thus, it did not meet element (i) of the definition. Prior to the closing date, Mary was to sell one share of stock to each of three officers of Buyer. This was to be done so that Pioneer was a qualified corporation for the underlying stock purchase with Buyer.

         The purchase agreement explicitly laid out the restructuring intended to make the Sellers' sale to Buyer eligible for the special capital gains election:

Ownership of Stock at Closing. It is the intention of the parties to structure the transaction in a manner that complies with the requirements of Neb. Rev. Stat. §§ 77-2715.08 and 77-2715.09 (R.R.S. 2009) in order to permit Sellers to subtract the capital gain from the sale of the Stock from their federal adjusted income pursuant to Neb Rev Stat. § 77-2715.9 [sic] (R.R.S. 2009) and exclude such gain from Nebraska income tax. Accordingly, at least three (3) days prior to the Closing, Mary [M.] Stewart agrees to transfer One (1) share of the Pioneer Stock to each of [three officers of Buyer] in exchange for non-recourse notes in an amount equal to .011% of the Stock Purchase Price, which notes shall be due and payable at the Closing; secured by a first lien in the Pioneer Stock so transferred; and be subject to the terms of this Agreement ....

         On February 26, 2010, pursuant to the plan in the purchase agreement, Mary entered into separate agreements for the sales of stocks with the three officers, and Pioneer issued new stock certificates for the four of them to reflect the sale. At closing, on March 1, the Sellers and the officers ...

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