In Uncategorized on 11/04/2021 at 13:54

The Kalin Twins’ 1959 hit is a gift that keeps on giving. Today Judge Albert G. (“Scholar Al”) Lauber tosses a summary J motion in GWA, LLC, George A. Weiss, Tax Matters Partner, Docket 6981-19, filed 11/4/21*.

This is another tax deferral dodge marketed by overseas banks, whereby a US taxpayer buys a basket of publicly-traded stocks and can trade at will, but recognizes nothing until some future date. The deal is styled an “option,” but IRS says it’s abusive.

GWA used a wholly-owned unrecognized LLC, OGI, to deal with this basket. GWA claims OGI can elect mark-to-market recognition per Section 475, claiming Section 1234 option status.

GWA says OGI can elect MTM, even though, as an unrecognized, it is not a taxpayer. IRS says only taxpayers can make the election. But Section 475(f)(1)(A) says the elector must be engaged in the trade or business of a securities trader.

Judge Scholar Al: ” The parties have focused much of their firepower on the statutory requirement that a person electing mark-to-market treatment must be “engaged in a trade or business as a trader in securities.” Sec. 475(f)(1)(A). Respondent contends that GWA was so engaged because it is treated during 1998 as conducting the securities trading activities of OGI. OGI being a disregarded entity, ‘its activities are treated in the same manner as a sole proprietorship, branch, or division of the owner.’ Sec. 301.7701-2(a), Proced. & Admin. Regs. Because OGI is treated ‘as having no existence separate and distinct from’ its owner, Whirlpool Fin. Corp., 154 T.C. at 146, its securities trading business, for Federal tax purposes, was necessarily conducted by GWA.” Order, at p. 8.

For the Whirlpool story, see my blogpost “The Maytag Repairman,” 5/5/20.

GWA claims there are all kinds of complex legal questions in 2 Cir, whence they are Golsenized, about scope of activity as a stock trader. Happily, if GWA provably so traded before, Judge Scholar Al need not go there.

“We conclude that we need not decide–at least not at this stage of the litigation–whether OGI’s securities trading is attributed to GWA under the activities clause. In contending that GWA made the election, respondent needs to rely on the activities clause only if GWA itself engaged in no securities trading of its own during 1998. But respondent contends that the Deutsche Bank barrier transactions, which generated trading activity by GWA in the early 2000s, were not GWA’s first venture into this territory. Respondent alleges that GWA may itself have engaged in trading securities–including basket securities acquired from the Royal Bank of Canada–as early as 1998, before the mark-to-market election was made. Respondent urges that such facts, if established at trial, ‘would affect the Court’s determination of whether, under section 475(f)(1)(A), GWA was “a person * * * engaged in a trade or business as a trader in securities.”‘” Order, at p. 9.

Issue finding, not issue determination…that’s summary J.

*GWA LLC Docket No 6981-19 filed 11 4 21


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