For the backstory on Terry L. Wright and Cheryl A. Wright, T. C. Memo. 2024-100, filed 10/30/24, check out my blogpost “‘You’d Better Not Pout’- Part Deux,” 3/15/16*. Terry and Cheryl had a big capital gain when Terry’s business was sold for stock, which he later unloaded. Some dodgefloggers got him into foreign currency exchange options, which he testified on the trial he did to get some tax deductions.

Though his trusty attorneys argue he wanted to make a profit, ex-Ch J L. Paige (“Iron Fist”) Marvel isn’t having any. Section 165(c) bars any non-casualty loss deduction not connected to trade, business, or profit-seeking activity.

“The Wrights realized substantial capital gains on the sale of Mr. Wright’s…stock in the first half of [year at issue]. Mr. Wright credibly testified that in [year at issue] his estate planning attorney and his accountant ‘realized that we could use some tax losses.’ Mr. Wright also credibly testified that he first understood that the foreign currency option transactions at issue would generate a tax loss based on an explanation from his estate planning attorney in fall [year at issue]. [Terry’s and Cheryl’s LLC] then entered into the foreign currency option transactions at issue, which generated a valuable capital loss, just before the end of the Wrights’ [year at issue] taxable year.” T. C. Memo. 2024-100, at p. 10.

IRS’ expert dissects the USD-EUR straddle offset by the EUR-DKK (Danish krone) straddle with a digital kicker, and kicks the kicker to the curb, unsaddling the straddles. It’s the usual Bialystok, a deal that cannot make money but generates a deductible loss offset by an unrecognized gain.

Y’all will recall that 6 Cir knocked out IRS’ argument that the straddles weren’t Section 1256 mark-to-market option contracts. Terry and Cheryl argue that’s “game over.”

“The Wrights also argue that the Sixth Circuit’s opinion in Wright III somehow precludes us from considering any issues other than economic substance. They state that the Sixth Circuit ‘determined that there was one remaining issue on which the Tax Court had failed to rule, the question of economic substance.’ While it is true that ‘[a] holding on an issue by an appellate court must be followed in all subsequent proceedings in the same case in the trial court or on a later appeal in the appellate court,” Pollei v. Commissioner, 94 T.C. 595, 601 (1990), the Wrights’ description of what the Sixth Circuit held in Wright III is highly inaccurate. The Sixth Circuit held that we should not have granted partial summary judgment to respondent because our determination that a foreign currency option could not be a foreign currency contract within the meaning of section 1256 was incorrect as a matter of law. Wright III, 809 F.3d at 881, 883–85. It therefore ‘remanded for further proceedings consistent with [its] opinion.’ Id. at 885. The Sixth Circuit did not state that it was limiting our consideration of any issues on remand.” T.  C. Memo. 2024-100, at p. 20.

Section 165 disallows these tax-motivated losses.

Taishoff notes that the year at issue is more than twenty (count ’em, twenty) years ago. With $603K in deficiency, even though IRS waived the Section 6662(a) chops, when you reckon in the interest, Terry and Cheryl would have done better to pay the tax.

* https://taishofflaw.com/2016/03/15/youd-better-not-pout-part-deux/