In Uncategorized on 09/25/2020 at 17:45

Well, maybe trial was unnecessary, but expedite litigation? Sixteen (count ’em, sixteen) years after the year the return was filed; eleven (count ’em, eleven) years after the SNOD and petition; ten (count ’em, ten) years after IRS moved for summary J; eight (count ’em, eight) years after petitioners responded and cross-moved; today (drumroll and cymbal crash) Judge Gale decides for IRS in James W. Loomis & Janice K. Usher, Docket No. 8739-09 (yes, that’s not a misprint), filed 9/25/20.

I’m a fan of summary J motions. It gets all the cards on the table, and is way cheaper than the usual discovery gameplaying. Like the old Yellow Pages, when summary J is the game, if it’s out there, it’s in here (your papers); if not, you may be barred from using it.

But it shouldn’t take eight years to decide.

Jim’s & Jan’s unhappy tale gives me another look at that improbably-named but larcenously-inclined Yuri Debevc Derivium. Y’all will remember YDD, of course? Well, if any amongst you are having a senior moment, see my blogpost “We Wuz Robbed,” 8/7/12.

It’s the usual. Jim is trying to Section 1042 rollover his way out of a $4.26 million gain on his eponymous corporate stock (basis zilch) by laying same off on an ESOP, and buying Qualified Replacement Property (QRP), which everyone agrees qualifies for deferral.


Jim immediately hands same to YDD’s shell-shill, which sells at once, and “lends” Jim & Jan 90% of proceeds for 29 years, non-recourse. The loan documents give the shell-shill absolute rights; there’s no need for events of default, notice, consent: YDD can do what it wants with the QRP.

Jim & Jan did pay interest on the “loan” for a couple years (hi, Judge Holmes). And no one claims Jim & Jan acted in bad faith. But chops aren’t on the table (this is all way before Boss Hossery blipped the radar).

And economic substance is the key, however Judge Gale describes it.

“At the outset, we note that regardless of what a borrower might subjectively wish to accomplish by engaging in a transaction like the one at issue here, a loan providing a borrower with 90% of the value of the pledged collateral in cash would produce two tax benefits compared to simply selling the collateral for 100% of its value. First, whereas any gain realized upon selling property generally must be immediately recognized for Federal income tax purposes, see sec. 1001(a), (c), loan proceeds are not treated as income and a borrower can therefore make use of the proceeds tax free throughout the loan term…. Second, a borrower with a low basis in the collateral (here, respondent determined that Mr. Loomis’s basis in the [QRP] was zero, and petitioners have not challenged that determination) would expect to retain only about 80% of the value of the collateral after selling it and paying tax on the capital gain; a 90% loan would therefore allow the borrower to make use of an additional 10% of the collateral value during the loan term. See sec. 1(h) (setting maximum capital gains tax rates); Calloway v. Commissioner, 135 T.C. 26, 30 (2010) (noting that the taxpayer in that case testified that he engaged in a 90% loan transaction with Derivium because it made more economic sense than selling the collateral and paying 20% in tax).” Order, at p. 6, footnote 7.

Non-recourse means Jim & Jan have no risk. If at maturity the QRP is worth more than the loan balance, pay off the loan balance and get back the QRP, or make Derivium buy it in the market, and he loses money. If worth less, let Derivium keep the QRP and walk with the proceeds.

True, Jim & Jan paid interest. But the QRP was floating rate notes from United Parcel Service, which hasn’t defaulted yet, and the interest from UPS was an offset to the interest Jim & Jan owed Derivium on the “loan.”

The QRP was never collateral; as per Derivium’s SOP, he dumped the QRP on Day One. And the short-sale loan of stock to a broker analogy fails, because the broker in the leading case was only able to lend the stock to its customers for short-selling when the owner approved. Moreover, Congress subsequently enacted Section 1058; no gain to lending stockholder, provided they keep benefits and burdens; they must get back the identical shares. If they go up or down, the lending stockholder gets the gain or takes the loss. Here, Derivium could do anything he wanted, no consent necessary, and Jim & Jan got a loss-free ride. If the QRP went up at maturity, they got the gain, but if it went down they could walk at no cost.

Jim & Jan argue that the SNOD names the year after the transfer took place, and that’s the wrong year. “The relevant provisions of section 1042 establish that, in order to defer recognition of gain from selling stock to an ESOP during a given taxable year (Year 1), a taxpayer must do two things: (1) acquire QRP within a 15 month period that begins 3 months before the date of the sale and ends 12 months thereafter, and (2) file an election no later than the due date of his or her tax return for Year 1. See sec. 1042(a), (c)(3), (6). The end of the period for acquiring QRP and the deadline for filing the section 1042 election therefore both will always fall during the next taxable year (Year 2). Thus, if a taxpayer waits until Year 2 to purchase QRP, properly files a section 1042 election during Year 2 along with his or her Year 1 tax return, and also–for whatever reason–sells the QRP during Year 2, section 1042(e)(1) ends the deferral and the taxpayer will have to recognize the deferred gain on his or her Year 2 tax return. In such a scenario — which is precisely the scenario at issue in this case–the taxpayer has still successfully deferred recognition of the gain realized in Year 1 (and thus payment of any tax due on that gain) for a full taxable year. This remains true no matter how close in time the taxpayer’s purchase and sale of the QRP might be. Petitioners have pointed to no authority that persuades us that we should decline to hold them to the election that they made and from which they benefitted.” Order, at p. 16.

Don’t get me wrong. I’m grateful to Judge Gale for his exposition of Section 1042 rollovers. I’m grateful once again to encounter Yuri Debevc Derivium; they don’t make ’em like that any more.

But why make me flip through 249 (count ’em, 249, and I did) orders to find this gem? Judge Kerrigan designated a simple 6320 CA shootdown where the petitioner wasn’t current with taxes.

I know you want to keep me busy during the lockdown, Judge, but please, give me a break and designate these, before your Genius Baristas take designated orders away altogether.








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