Abe Lincoln was quite a phrasemaker. As I read the Tax Court outpouring every working day, I often find the “mystic chords of memory” plucked, strummed, and sometimes even slammed. Today, William A. Hammond & Irma Hammond, Docket No. 20860-18, filed 2/1/22, and Judge Travis A. (“Tag”) Greaves, are playing dueling dulcimers. It’s the old cash-for-stock-hedgeroo I’ve blogged so often, but this version comes with a twist.

Longtime readers of this my blog will recall the game. Petitioner has stock with ginormus FMV, basis bupkis (please excuse arcane technical term). If sells, gets 80% of gain, post-tax at capital gains rates. So petitioner borrows 90% of FMV from hedger with interest accruing, repayment due in three years with no permitted prepayment, nonrecourse. As Judge Tag Greaves says “(U)se of terms like ‘loan’, ‘collateral’, ‘lend’, ‘hedge’, ‘principal’, ‘interest’, ‘maturity’, etc., are for convenience only. We do not intend for our use of those terms to imply that [the transactions at issue] constituted loans for Federal tax purposes.” Order, at p. 1, footnote 3.

At maturity, Petitioner can elect to (a) get the stock back upon paying principal and interest, or (b) walk away and owe nothing, the hedger keeping the stock. The hedger was supposed to be hedging, but had the right to sell. Of course, the hedger sold, gave petitioner the 90%, Ponzi’d some of the rest, kept the balance, and jumped the hedge.

OK, an old story. See my blogpost “Expedite Litigation and Avoid Unnecessary Trials,” 9/25/20 (and note the Loomis case is on appeal to 9 Cir).

So where’s the aforementioned twist?

“Petitioners’ argue, however, that respondent has improperly applied this doctrine [substance-over-form] with respect to the [year at issue] transactions. Petitioners contend that this doctrine applies only if both of the following requirements are met: (1) the form adopted in a transaction differs from its economic substance; and (2) that form results in a measurable tax benefit that would not otherwise be allowed to the taxpayer if the transaction were characterized according to that substance. Petitioners further posit that this second condition was not met in that ‘they did not receive a tax benefit’ by entering into the [year at issue] transactions because if the [year at issue] transactions are respected according to their alleged form, then the master agreements would ‘give rise to the exact same tax consequences’ in that both characterizations—either a sale or loan—would result in taxable long-term capital gains.

“In an attempt to support their allegations, petitioners specifically claim that if the [year at issue] transactions are respected according to their form then they would have had to recognize capital gain income on their[maturity] return in the form of discharge of indebtedness and that respondent ‘should have assessed tax against [p]etitioner in year [maturity] (not in [year at issue]) when [p]etitioner earned capital gains by voluntarily surrendering the … [s]tock in satisfaction of the [l]oan[s].’” Order, at p. 6. (Footnote omitted, but it says that having 90% of the FMV in cash for three years tax-and-interest-free isn’t too shabby).

OK, but.

Bill & Irma didn’t allege or prove that they picked up the gain on the stock sale in the maturity year either.

And none of the prior cases followed the argument that Bill’s & Irma’s trusty attorney makes now, so Judge Tag Greaves isn’t overturning them.

But said trusty attorney gets a Taishoff “Good try.”