The parties disagree about whether petitioner was a commodities dealer for purposes of section 108; *90 however, we shall assume, without deciding, that petitioner was a commodities dealer when the 1977 and 1978 spreads were transacted. otherwise in violation of the rules of the exchange in which he was a member. Cook v. Commissioner, 90 T.C. 975">90 T.C. 975, 986 (1988). See also H. Rept. 99-426 (1985), 1986-3 C.B. (Vol. 2) 911. Respondent asserts that the 1977 and 1978 spreads were prearranged or otherwise in violation of NYMEX rules, so that the per se rule of section 108(b) is not available to sanction petitioner's spreads. As such, respondent posits that petitioner must meet the requirements of section 108(a) in order for the losses on the spreads to be allowed.
Section 108(a) provides that in the case of straddle transactions, such as the spreads in issue, deductions are allowed for incurred losses if the straddle transactions were entered into for profit. See Glass v. Commissioner, 87 T.C. 1087">87 T.C. 1087, 1175 (1986). Before we may inquire as to whether straddle transactions were entered into with a profit motive, however, we first must determine that the spread transactions themselves were bona fide, i.e., not shams. Sochin v. Commissioner, 843 F.2d 351">843 F.2d 351, 353 n. 6 (9th Cir. 1988), affg. Brown v. Commissioner, 85 T.C. 968">85 T.C. 968, 998 (1985); Forseth v. Commissioner, 85 T.C. 127">85 T.C. 127, 166 (1985), affd. 845 F.2d 746">845 F.2d 746 (7th Cir. 1988), affd. sub nom. Enrici v. Commissioner, 813 F.2d 293">813 F.2d 293, 295 n. 1 (9th Cir. 1987), affd. sub nom. Mahoney v. Commissioner, 808 F.2d 1219">808 F.2d 1219, 1220 (6th Cir. 1987), affd. without published opinion sub nom. Bramblett v. Commissioner, 810 F.2d 197">810 F.2d 197 (5th Cir. 1987), affd. without published opinion sub nom. Wooldridge v. Commissioner, 800 F.2d 266 (11th Cir. 1986). See also sec. 1.165-1(b), Income Tax Regs. As we noted when presented with similar facts in another case, "Alleged transactions involving commodity futures contracts which are not in fact bona fide will not be recognized for Federal tax purposes." See DeMartino v. Commissioner, T.C. Memo. 1986-263, and cases cited therein. Respondent asserts that the 1977 and 1978 spreads were "rigged, prearranged, manipulative, or fictitious," i.e., not bona fide, and that the spreads therefore are devoid of the substance necessary for recognition for tax purposes.
It is well established that income tax deductions are a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer. Interstate Transit Lines v. Commissioner, 319 U.S. 590">319 U.S. 590, 593 (1943). See also Rule 142(a). Petitioner has alternative burdens of proof in the instant case. In order for the per se rule of section 108(b) to be available with respect to the spreads at issue, petitioner must prove that the provisions of section 108(b) apply to those spreads. If petitioner fails to show his entitlement to section 108(b) treatment, he must prove that he entered into the straddle transactions with the requisite profit motive in order for the losses on the spreads to be allowed under section 108(a). As we noted above, transactions must be bona fide before losses are allowable under section 108(a); thus, petitioner must show that the 1977 and 1978 spreads were bona fide. In short, if section 108(b) does not apply to petitioner's spread transactions, a failure to prove either the bona fides of the spreads or the requisite profit motive will cause those spreads to be disregarded for tax purposes.
The facts surrounding trading on the NYMEX in gold and silver coin futures strike us as being quite similar to those before the Court in United States v. Winograd, 656 F.2d 279 (7th Cir. 1981). In Winograd the taxpayers executed trades on a legitimate market, but those trades were prearranged, not executed through bona fide transactions in the competitive market in the usual manner of open outcry. The Seventh Circuit stated that "appellants appeared to be utilizing the organized market, but were in fact creating a market for their transactions at the prices they established for ulterior purposes. Such prearranged trades are not bona fide transactions supporting loss deductions." (Emphasis in original.) 656 F.2d at 283. That statement by the Seventh Circuit would apply as well to the NYMEX gold and silver brokers during 1977 and 1978, and we also find that the transactions at issue in the instant case were not bona fide transactions. The reasons for our conclusion follow.
Respondent's expert witness in the instant case, Edward O'Brien, also testified as an expert witness in the case in which the CFTC charged Mr. Buckwalter and other NYMEX brokers with the violation, inter alia, of section 4c(a) of the Commodity Exchange Act (7 U.S.C. sec. 6c(a) (1976)*94 well as CFTC regulation 1.38 ( 17 C.F.R. sec. 1.38 (1977)), by executing wash sales and accommodation trades and causing the reporting of prices which were not true and bona fide. See In the Matter of Stanley Buckwalter, et. al., supra at 31,268. Such findings were based, in large part, on petitioner's 1977 and 1978 spreads as analyzed by Mr. O'Brien in an expert witness report. In the instant case, Mr. O'Brien submitted an expert witness report substantially identical to the one he submitted in the Buckwalter case.
Although the findings in Buckwalter are not determinative of the issues in the instant case, the analysis in that case was based on the same transactions. The analysis in Buckwalter thus is helpful in setting the framework for our analysis in the instant case. First, however, we must ascertain the meaning of the terms "accommodation trades" and "wash sales" in the context of commodities futures law. For purposes of commodities law, "accommodation trading" is defined as wash trading entered into by a trader, usually to assist another with illegal trades, and "wash trading" is defined as entering into, or purporting to enter into, transactions to give the appearance that purchases or sales have been made, usually without a change in the trader's market position. Sundheimer v. Commodity Futures Trading Commission, 688 F.2d 150">688 F.2d 150, 152 (2d Cir. 1982) (quoting from Committee on Agriculture, Nutrition, and Forestry, 95th Cong. 2d Sess., Futures Trading Act of 1978, Glossary of Terms Used in Commodity Futures Trading (Comm. Print 1979)). The essential and identifying characteristic of a wash sale seems to be the intent not to make a genuine, bona fide trading transaction. Sundheimer v. CFTC, supra (quoting CFTC v. Savage, 611 F.2d 270">611 F.2d 270, 284 (9th Cir. 1979), and In re Goldwurm, 7 Agric. Dec. 265, 274 (1948)Sundheimer v. CFTC, supra.
Petitioner has introduced no evidence whatsoever to indicate that his 1977 and 1978 spread transactions would not fit under the foregoing descriptions of wash trades and accommodation trades. Indeed, the fact that petitioner exactly broke even, exclusive of commissions, on each of his three series of spreads supports a conclusion that the trades were rigged or prearranged and not bona fide, competitive, market trades. That each series of spreads exactly broke even seems to us too convenient to be explained away by the long arm of coincidence. See Mahoney v. Commissioner, 808 F.2d at 1220. The thinness of the NYMEX gold and silver futures markets apparently allowed the group of brokers charged and sanctioned by the CFTC to prearrange the transactions without substantial threat of market volatility beyond their control. As was noted in another case describing the NYMEX silver coin market as a "thin, infrequently traded market with low daily volume," "the possibilities are enhanced that such market prices that are reported may be because of discretionary determination by exchange officials or improper influence by market participants rather than a reflection of supply and demand, technical trading signals, world and national news reports or independently occurring events." See Gittemeier v. Smith Barney, Harris Upham & Co., CFTC docket No. R 80-1255-81-182, Comm. Fut. L. Rep. (CCH) [1982-1984 Transfer Binder] par. 21,929, at 28,006 (Nov. 30, 1983), and articles cited therein.
The absence of split fills in the execution of petitioner's spreads also indicates a lack of competitive trades. Mr. O'Brien's expert report asserted that it was highly unlikely that these comparatively large multicontract lots could be competitively traded at a single price and time of execution on futures markets which otherwise had very limited volume. As was similarly noted in Buckwalter, it is an unexplained, "seemingly odd coincidence that so frequently when a large order appeared on the floor another trader appeared willing to take the entire order." See In the Matter of Stanley Buckwalter, et. al., supra at 31,250. Petitioner has not advanced sufficient evidence to persuade us that the spreads in issue were executed in accordance with all the rules of the NYMEX. In fact, the exact equality of all gains and losses, the thinness of the silver coin and 400-ounce gold markets, and the absence of split fills, when taken together, indicate that the 1977 and 1978 spreads were wash sales or accommodation trades in violation of the rules of the NYMEX. We accordingly find that the per se rule of section 108(b) is not available with respect to petitioner's 1977 and 1978 spread transactions. Cook v. Commissioner, supra.
The wash sale or accommodation nature of the spread trades also indicates that petitioner's 1977 and 1978 spreads were not bona fide, i.e., that they were risk-free transactions devoid of any true economic substance. Petitioner has not advanced sufficient evidence for us to conclude that the spread trades were bona fide. Petitioner testified that he knew nothing about any prearrangement of trades for his account, and that his instructions to Mr. Buckwalter were to close out the spread positions as soon as possible after yearend so as to break even or yield a profit. Even if petitioner truly did not know his trades were executed noncompetitively and were not bona fide, however, his ignorance does not change the true nature of the trades. Where transactions in fact are devoid of economic substance, they are economic shams and are not to be recognized for tax purposes. See Lynch v. Commissioner, 273 F.2d 867">273 F.2d 867, 872 (2d Cir. 1959); Cherin v. Commissioner, 89 T.C. 986">89 T.C. 986, 994 (1987). *100 In conclusion, based upon our careful review of the entire record, we find that petitioner has failed to prove that his 1977 and 1978 spreads were bona fide trades. We therefore uphold respondent's determinations with respect to the reported losses and gains on the 1977 and 1978 spreads. *101 in January 1977. *102 to his 1976 spreads: (1) Those transactions were held in an account with Chartered New England Corp., not Rosenberg Commodities, and there is no evidence whatsoever that the floor broker for those 1976 spreads was Mr. Buckwalter or any other broker sanctioned by the CFTC; (2) none of the prearranged transactions at issue in the Buckwalter case took place before July 5, 1977, i.e., several months after petitioner's 1976 spreads were completed; and (3) the record contains no evidence whatsoever to indicate that petitioner's 1976 spreads were wash trades, accommodation trades, or any other sorts of trades which were not bona fide, competitive, market trades. As such, petitioner clearly has failed to show that the income from the 1976 spreads reported on his 1977 tax return is not properly includable in taxable income. Rule 142(a). We therefore find that petitioner is not entitled to any reduction in his 1977 taxable income on account of his 1976 spreads. *103 We next turn to the final issue -- whether petitioner is liable for the addition to tax for fraud pursuant to section 6653(b). Stoltzfus v. United States, 398 F.2d 1002">398 F.2d 1002, 1004 (3d Cir. 1968); Webb v. Commissioner, 394 F.2d 366">394 F.2d 366, 377-378 (5th Cir. 1968); Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1123 (1983).
The existence of fraud is a question of fact to be resolved upon consideration of the entire record. Gajewski v. Commissioner, 67 T.C. 181">67 T.C. 181, 199 (1976), affd. without published opinion 578 F.2d 1383">578 F.2d 1383 (8th Cir. 1978). Fraud never will be presumed ( Beaver v. Commissioner, 55 T.C. 85">55 T.C. 85, 92 (1970)); however, it may be proved by circumstantial evidence because direct proof of a taxpayer's intent rarely is available. Rowlee v. Commissioner, 80 T.C. at 1123; Gajewski v. Commissioner, 67 T.C. at 200. The taxpayer's entire course of conduct may establish the requisite fraudulent intent. Stone v. Commissioner, 56 T.C. 213">56 T.C. 213, 224 (1971); Otsuki v. Commissioner, 53 T.C. 96">53 T.C. 96, 106 (1969).
At the outset, we note an absence of the usual badges of fraud. Petitioner did not consistently underreport his income ( Holland v. United States, 348 U.S. 121">348 U.S. 121, 137 (1954); Otsuki v. Commissioner, 53 T.C. at 107)); at most, he deferred the reporting of part of his income by 1 year by the use of commodities futures spreads and failed to report on one return the results of five spread transactions completed on January 3, 1978 -- four gains and one loss netting a gain of $ 126,305. Petitioner's failure to report the January 3, 1978, transactions is not sufficient to establish fraud ( Merritt v. Commissioner, 301 F.2d 484">301 F.2d 484, 487 (5th Cir. 1962)); indeed, it appears to us that his failure to include those transactions on his 1978 return was merely an oversight, albeit a negligent one. We have seen no indication that petitioner's records of his spreads were inadequate, that petitioner failed to file tax returns, that petitioner has concealed his assets, or that petitioner has not adequately cooperated with tax authorities. See Bradford v. Commissioner, 796 F.2d 303">796 F.2d 303, 307 (9th Cir. 1986). Petitioner also has not filed any false documents. See Stephenson v. Commissioner, 79 T.C. 995">79 T.C. 995, 1007 (1982), affd. 748 F.2d 331">748 F.2d 331 (6th Cir. 1984). At most, the reporting of the spreads on his tax returns was an assertion that he had a right to the reported gains and losses from the spread transactions.
Respondent bases his allegation of fraud on his assertions that petitioner had actual knowledge that the 1977 and 1978 spreads were prearranged and without economic substance, and that petitioner thus took deductions for transactions which he knew were lacking in economic substance. Respondent, however, has failed to prove clearly and convincingly that petitioner actually knew of the prearranged and noncompetitive nature of the 1977 and 1978 trades. At best, the record as a whole provides only a suspicion that petitioner might have known that Mr. Buckwalter and the other sanctioned brokers were fixing or prearranging the contracts. This Court, however, will not sustain a finding of fraud based upon circumstances which at the most create only suspicion. Green v. Commissioner, 66 T.C. 538">66 T.C. 538, 550 (1976); Ross Glove Co. v. Commissioner, 60 T.C. 569">60 T.C. 569, 608 (1973). The standard of proof for fraud requires clear and convincing evidence. We therefore hold that respondent has failed to prove that petitioner is liable for additions to tax for fraud.
To reflect the foregoing,
Decision will be entered for respondent, except as to the addition to tax pursuant to section 6653(b).
Document Info
Docket Number： Docket No. 6602-83
Judges： Wells
Filed Date： 6/15/1988
Precedential Status： Precedential
Modified Date： 11/14/2024
