In Uncategorized on 10/31/2019 at 16:05

As we start the basketball season, Judge Ruwe is getting back a blocked shot from a Monster forward; here’s Estate of Andrew J. McKelvey, Bradford Peters, Executor, Docket No. 26834-14, filed 10/31/19.

You’ll doubtless recall that the late Andrew’s Monster forward had scored big-time, according to Judge Ruwe. If not, see my blogpost “A Monster Forward,” 4/19/17.

Well, 2 Cir wasn’t so sure. They found that the late Andrew had not extended the contracts, but had entered into new contracts and had constructively sold the Monster shares, because there was a statistically insignificant chance the share price would rebound to let the late Andrew (or his estate) keep any. So the late Andrew’s attempt to extend until he died and his estate get the stepped-up basis cratered.

And the purported extensions are new contracts. So there’s both short-term capital gains and long-term capital gains in play. Short-term on the “extension” deemed termination,  and long-term on the constructive sale of the new contracts (which supposedly would never hit the “sweet spot” on termination).  See Estate of Andrew J. McKelvey v. Commissioner, No. 17-2554 (2d Cir. 2018), decided 9/26/18, cert. den.. 6/13/19.

Clear? Thought not.

But this is what 2 Cir meant. “A taxpayer and his VPFC long party can often be expected to repeat these extensions for the taxpayer’s life, knowing that at his death the shares will have a stepped‐up basis in the hands of his estate. The up‐front payment will have been received without ever incurring the capital gains tax that would have been due had the payment resulted from a sale of the stock. In this case that payment was $194 million, and thus far, no capital gains taxes have been paid. The Internal Revenue Code should not be readily construed to permit that result.” 17-2554, at p. 31.

But 2 Cir bucks this frittata back to Judge Ruwe, to decide.

“Whether the replacement of the obligations in the original VPFCs with the obligations in what we hold are new contracts satisfies the criteria for a termination of obligations that gives rise to taxable income, presumably capital gain, and the amount of such gain are issues that we leave for determination in the first instance by the Tax Court on remand.” No. 17-2554, at p. 20.

So Judge Ruwe tells the parties to brief this stuff seriatim.

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