In Uncategorized on 04/25/2017 at 16:31

The current iteration of the Hurford case gave me a good case of headscratching. See my blogpost “As Clear as Anything in the Code,” 4/17/17.

How did Hurford Management No. 2, Ltd., the FLP which paid tax on the phantom stock, decide to pay tax thereon as a short-term capital gain?

Judge Holmes couldn’t figure it out, and I was befogged as well.

But let me float this by y’all, and tell me if it works. Judge Holmes, if you’re reading this, please weigh in.

When the late Gary died, the phantom stock was IRD. In the late Thelma’s hands, while she lived, it was taxable as ordinary income at the sooner of (a) when redeemed or (b) when transferred.

But the late Thelma never redeemed and never paid tax when she transferred. The first round of litigation resulted in the phantom stock being clawed back into Thelma’s estate, even though she transferred it while still alive to the FLP.

IRS and FLP stipulate basis in the hands of FLP. But it’s still IRD, ordinary style, until Judge Holmes decides that the character of the phantom stock changed from ordinary to capital when it got to FLP.

And moreover, the firm impassioned stress of Pilgrim’s Pride walking away from stock and into 5th Cir. turned the redemption event into a sale or exchange of a capital asset, thus capital gains tax treatment, per Section 1234A(1). See my blogpost “Just Walk Away – Part Deux,” 3/10/14.

So the only missing fact is how long FLP held the phantom stock before the five-year mandatory redemption happened. If less than a year and a day, short-term capital gain.

Clear? Thought not.


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