Supplying Some Missing Links

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December 28, 2012

In addition to providing analysis and updates on pending tax appeals, this blog is intended to serve as a resource where readers can easily access the briefs and relevant opinions in those cases.  Because of the press of business and other reasons, the posting of a couple of the opinions in cases we have discussed has slipped through the cracks.  So we are providing links to those opinions here, even though the opinions are long past the point of “breaking news”:

The Second Circuit’s decision in TIFD (“Castle Harbour”), once again reversing the district court and holding that the banks did not qualify as partners under § 704(e)(1), and that the government could impose a penalty on the taxpayer for substantial understatement of income.

The Eleventh Circuit’s decision in Calloway, affirming the Tax Court and holding that the transaction in question was properly treated as a sale, not a loan, and upholding the penalties.  The decision approves the multi-factor approach employed by the Tax Court majority, and notes infirmities in the alternative analytical approaches suggested by Judges Halpern and Holmes in their respective concurring opinions.

The Supreme Court’s decision upholding the Affordable Care Act (linked below).  The opinion was eventually entitled NFIB v. Sebelius, although we had covered it using the caption of one of the companion cases, HHS v. Florida.  The discussion of the Anti-Injunction Act, the issue that was covered in the blog, is found at pages 11-15 of the Court’s slip opinion.  Our prior coverage (linked here only so that I can show off my against-the-mainstream prediction that the legislation would survive) can be found here and here.  The majority’s key holding that the individual mandate could be upheld as an exercise of the Taxing Power is found at pp. 33-44.

NFIB v. Sebelius Supreme Court decision (Affordable Care Act)


More Securities Loan Cases on Appeal

Post by
March 21, 2011

A while ago we reported on a spate of IRS successes in cases involving purported securities loans (here).  The Samueli case is fully briefed in the Ninth Circuit and is expected to be argued in the next couple of months.  As we anticipated, two more of those cases, Anschutz and Calloway, have been appealed to the Tenth and Eleventh Circuits, respectively.  The taxpayer in Calloway filed his opening brief on March 15, 2011 (linked below).  Briefing has not yet begun in Anschutz.

In Calloway, the taxpayer was an IBM employee of many years who had acquired IBM stock during his employment.  By the time of the transaction in question, the stock’s value was five times the taxpayer’s basis.  Desiring to monetize the stock, and by his own admission, seeking to maximize his after-tax return, the taxpayer entered into an arrangement whereby he transferred his stock to a counterparty in return for a loan equal to 90% of the stock’s fair market value.  This resulted in a 10% higher return than a straight sale subject to long-term capital gains tax.   Under the arrangement, the taxpayer had no right to any dividends, no ability to reap any gains from appreciation of the stock, and no right to recall the stock during the loan period.  The counterparty had the right to sell or otherwise dispose of the stock it purportedly held as collateral.  At the close of the three-year loan period, the taxpayer had the option of repaying the principal with interest to redeem his collateral, refinancing the transaction for an additional term, or surrendering his collateral in exchange for extinguishment of the debt.  As the stock had depreciated significantly, the taxpayer chose to surrender his collateral.  Notably, not only did the taxpayer not report the transaction as a sale, he also did not report any cancellation of indebtedness income upon extinguishing the purported debt.

The IRS challenged the taxpayer’s treatment of the transaction as a loan, asserting that in substance the arrangement was a sale of the taxpayer’s securities.  In a reviewed decision, the Tax Court agreed with the IRS that the transaction was indeed a sale, primarily because the benefits and burdens of ownership of the stock had in fact passed to the counterparty (under an application of the test articulated in Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221 (1981)).  Of course, it didn’t help the taxpayer that the counterparty had been sued successfully for promoter penalties and for an injunction to cease all further shelter promotion activities.

On appeal, the taxpayer’s position centers around the arguments that (1) the Tax Court’s finding that the counterparty had the right to sell the stock immediately was clear error, and (2) the finding that the taxpayer could not demand the return of his stock during the three-year period was also clear error.  These arguments apparently are based on the position that the counterparty did not have the right to sell the stock until a “legitimate” loan was already in place, and because the counterparty used the stock sale to finance the purported loan, no such right ever accrued.  Thus, according to the taxpayer, he remained in control of the stock under the terms of the arrangement, and therefore the transaction is subject to the safe harbors under I.R.C. § 1058 and Rev. Rul. 57-451, and furthermore should not be deemed a sale under the applicable common law securities-loan authorities.

We’ll provide an update when the government files its response, and we’ll post on Anschutz when the briefing gets under way (the opening brief is due May 2).  On a related note, the Tax Court recently held for the government in a case involving a transaction materially identical to the one in Calloway.  See Kurata v. Commissioner, T.C. Memo 2011-64 (March 16, 2011).

Calloway Appellant Brief