Judge Gale has a blast from the past for us today, as Edward L. Berman and Ellen L. Berman team up with Cousin Annie Berman in 163 T. C. 1, filed 7/16/24, to explore the interface between Section 1042 deferral of ESOP stock gains with Section 453 installment sale reporting. Into that statutory goulash jumps the improbably-named but larcenously-inclined Yuri Debevc Derivium, the alchemist who claimed to turn capital gains into non-taxable debt; long-time readers of this my blog will recall Greg and Sue Raifman, entrapped by ol’ Yuri in my blogpost “We Wuz Robbed,” 8/7/12.

Briefly, the Bermen had $4 million in ESOP stock they wanted to turn to cash. Yuri got them to sell same back to the ESOP for the ESOP’s promissory notes, and buy some A-rated variable rate notes from listed outfits on margin, which they sold to him for 90% of face (he selling same at par and keeping the change). The variable notes were Qualified Replacement Property, so would defer gain from sale back to ESOP until sale or payoff of the ESOP’s notes. Except Yuri and the Bermen tried to disguise the sale of the variable notes as a loan, which triggered gain. The ESOP couldn’t pay the notes they gave the Bermen.

OK, the Bermen have gain. And Section 1042(e) says gain must be picked up in year of disposition of QRP, which would be year when the Bermen did the “loan” deal with Yuri. But the Bermen got nothing that year, and only got paid something in the next.

The Bermen claim their 1042 election was defective because of their defective opt-out from Sub S status to C Corp (only C Corp stock qualifies for Section 1042 treatment), but they’re a day late per Section 1362(e)(2)(B), and anyway duty of consistency means their position, taken for a year now closed, bars them from revoking it now. Likewise, their claim that their Section 1042 election was induced by fraud fails, because there was no mistake as to then-existing fact, only as to legal consequences.

But the Bermen can use Section 453 to throw gain into the next year, because any payment received after the year of sale automatically invokes Section 453 installment sale reporting.

See 163 T. C. 1, at pp. 27-32 for the rundown. It’s a technician’s delight.

Judge Gale has been here before; see my blogpost “Expedite Litigation and Avoid Unnecessary Trials,” 9/25/20.