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Dennis S. Brown, et al., Brown v. CommissionerDocket Nos. 29929-82, 2313-83, 3083-83, 3503-83December 18, 1985, Filed
United States Tax Court *6 On October 24, 1985, by order of Judge Perry Shields the opinion filed in this case on August 26, 1985, was withdrawn. Revised opinion filed December 18, 1985, appears at
85 T.C. 968">85 T.C. 968 .Decisions will be entered under Rule 155 .Petitioners claimed deductions for fees and losses allegedly incurred with respect to forward contracts for purchase and sale of Ginnie Maes and Freddie Macs.
Held , the forward contracts and related transactions were factual shams and the deductions for fees and losses are disallowed.Held, further , the addition to tax undersec. 6653(a) I.R.C. of 1954 as determined by respondent against one petitioner is sustained, but damages under sec. 6673 are declined.Joseph Wetzel andRussell Sandor Ralph C. Jones andJoyce Britt Shields,Judge . Sterrett, Simpson, Goffe, Chabot, Nims, Parker, Whitaker, Korner, Hamblen, Cohen, Clapp, Jacobs, Wright, Parr, and Williams,JJ ., agree with this opinion. Wilbur,J ., concurs in the result only. Swift and Gerber,JJ ., did not *9 participate in the consideration of this case.SHIELDS*968 Respondent determined deficiencies in petitioners' Federal income tax as follows: *969
Additions to tax Petitioner Year Deficiency sec. 6653(a) Brown 1979 $ 49,562.50 Sochin 1979 9,402.00 1980 25,535.00 1981 18,288.00 Morgan 1977 2,283.00 $ 114.00 1979 104,022.00 5,217.35 1980 194,141.55 10,141.55 Leinbach 1979 205,181.69 1980 263,728.31 1981 218,036.46 After concessions, the issues remaining for decision are: (1) Whether petitioners realized deductible losses under section*10 165(c)(2) on forward contracts as claimed on their income tax returns for 1979, 1980, and/or 1981; (2) whether the fees paid by petitioners with respect to such contracts are deductible; (3) whether petitioners, Ellison C. Morgan and Linda Morgan, are liable for additions to tax under
section 6653(a) ; and (4) whether any of the petitioners are liable for damages under section 6673.FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations and exhibits associated therewith are incorporated herein by reference.
All of the petitioners resided in Oregon at the time their petitions were filed, and all of them filed income tax returns for 1979, 1980, and 1981 with the Internal Revenue Service Center at Ogden, Utah. On the returns, petitioners claimed to have suffered losses in the following amounts from the cancellation of forward contracts for the purchase or sale of certain mortgage certificates: *970
Petitioner Year Loss claimed Brown 1979 $ 106,160 Sochin 1979 20,621 1980 48,054 1981 38,785 Morgan 1979 224,416 1980 390,614 Leinbach 1979 394,676 1980 482,245 1981 401,412 All of the above losses allegedly *11 with respect to activities promoted by Gregory Government Securities, Inc., and Gregory Investment & Management, Inc. Over 1,400 other cases now pending before this Court have been identified as involving similar issues and factual situations. Upon learning of the number of such cases, the Chief Judge assigned all of them to this division of the Court. With the assistance of respondent and his counsel, and most of the 1,400 petitioners and their counsel, these four cases were selected as being generally representative with respect to the issues common to all the cases. *12 Gregory Government Securities, Inc. (GGS), and Gregory Investment & Management, Inc. (GIM) were incorporated in 1979 by William H. Gregory under the laws of the State of Oregon. At all times material to these cases, all of the stock outstanding in both corporations was owned by Mr. Gregory and his wife, and their corporate activities were conducted under his general supervision and control. Prior to 1979, Mr. Gregory had been the tax partner and a specialist in accounting for wood products with Arthur Andersen & Co., an international accounting firm. He was also the chairman of the firm's steering committee on tax shelters. He left Arthur *971 Andersen in July of 1979 in order to establish GGS and GIM. Shortly after its organization, GGS was registered with the Oregon Department of Commerce as a broker-dealer in securities. The registration continued through the balance of 1979 and throughout 1980 and 1981. No such registration was required of GIM in Oregon. Neither corporation was required to be registered as a broker-dealer under the Securities Exchange Act of 1934.
The promotion undertaken in 1979 by Mr. Gregory was purportedly to offer to "a limited number of knowledgeable, *13 sophisticated investors, * * * who understand both the economic and tax ramifications of the transactions," investments in forward contracts to purchase or to sell certificates issued by Government National Mortgage Association and Federal Home Loan Mortgage Corporation. These certificates are exempt from federal registration under the Securities Act of 1933. His program contemplated that GIM would serve as a financial adviser to the prospective investors, and GGS, as a registered broker-dealer, would serve as either a seller or a buyer on every transaction entered into with the investors.
Government National Mortgage Association (GNMA) is a corporation wholly owned by the Government through the Department of Housing and Urban Development. From time to time, GNMA issues registered certificates which represent undivided interests in a specified pool of mortgages guaranteed by GNMA, as well as by the Veterans' Administration, the Federal Housing Administration, or the Farmers Home Administration. These certificates are referred to in the market as "Ginnie Maes."
The Federal Home Loan Mortgage Corporation (FHLMC) is a corporation whose capital stock is owned by the Federal Home Loan*14 Bank Board and whose directors are appointed by the President with the advice and consent of the Senate. The directors of the Federal Home Loan Bank Board act as the directors of FHLMC.
FHLMC also sells mortgage certificates which are known as participation certificates and which are referred to in the market as "Freddie Macs." Each of these certificates represents an undivided fractional interest in a pool of conventional (non-VA and non-FHA) mortgages.
It is contemplated that a customer will enter into several forward contracts with the dealer, some of which will require the customer to make forward delivery to the dealer of securities, *16 while others will require the customer to take forward delivery from the dealer of securities. The forward contracts entered into by a particular customer will reflect a market strategy and interest rate forecast and could result in substantial gain or loss to the customer, depending on the volume of transactions and whether interest rate movement is in accordance with, or adverse to, his expectations.
The investment risk is diminished by the simultaneous purchase and sale of a forward contract. This purchase and sale is called a spread. The profit and loss potential of a spread results from the purchase of securities and the sale of securities with different coupon interest rates.
A change in interest rates affects the price of a low-coupon security a greater percentage than a high-coupon security. However, the low-coupon *973 security costs less, so even though its price varies at a greater percentage rate, the total change in price is less.
The usual investment strategy to profit from rising interest rates is to
purchase low-coupon andsell high-coupon securities. An opposite strategy would be used for a projected decline in interest rates. For example --Assume*17 a 9% current yield to maturity on a security paying interest semiannually and maturing in ten years. The investor forecasts interest rates to rise to 10%. This spread results in a profit:
Price Coupon 9-Percent 10-Percent Profit rate Face value yield yield (loss) Purchase (long) 8% $ 1,000,000 $ 935,000 $ 875,400 $ (59,600) Sell (short) 9 1,000,000 1,000,000 937,700 62,300 2,700 The profit would be reduced by transaction costs. * * * *
In the event a customer desires to be released from obligations under a particular forward contract, the customer may attempt to arrange for the cancellation of the obligations under the contract prior to settlement date. If the dealer agrees to cancel the contract, it will charge or credit the customer's account with an amount equal to the profit or loss that the customer is entitled to receive. In consideration for the release of the customer from his obligation to perform the contract the customer will also pay a fee to the dealer for risk and administrative costs created by the cancellation of the contract.
Alternatively, if the customer does not desire to be released from the obligations*18 under a particular forward contract (original contract), but wants to eliminate the risk created by such contract, he may enter into a forward contract bearing the position opposite that of the original contract. The customer may request that the dealer offset the newly acquired contract against the original contract or he may keep both positions open and either offset at a later date or close out the position in some other manner.
The tax and economic results of various types of transactions are summarized below. The federal income tax results should be discussed with your tax advisor and you should not rely on the chart. The results could be challenged for various reasons by the Internal Revenue Service, as explained in the tax aspects section of this memorandum. *974
*19TRANSACTION FEDERAL INCOME TAX ECONOMIC RESULTS RESULTS Delivery of securities Long position: none Gain or loss is until securities are sold. realized. Additional margin may be required Short position: short-term because of increased capital gain or loss risk unless a spread is re-established or all positions are closed. Sale or assignment Long-term capital gain or loss on contracts held over 1 year. Short-term 1 year or less. Cancellation Ordinary gain or loss. Offset or pair-off of Short-term capital gain identical contract or loss on all short positions and on all long positions held for 1 year or less on date of short sale. Opposing purchase or None Establishes no risk sale of securities situation locking in identical to open gain or loss for later positions realization. Opposing purchase or None Establishes spread sale of securities with potential for different from open gain or loss. positions The memorandum stated that the forward contracts were not listed on any security or commodity exchange; that each contract was between the investor as one party and GGS as the other; that the investor could not sell or assign his interest in any contract without the consent of GGS; that if the investor wished to be released from the obligations of a particular forward contract before its settlement date, he had the right to request that GGS cancel the contract; and that if GGS agreed to do so, the investor's account would be credited by GGS with an amount equal to any profit the investor was entitled*20 to receive or charged with any loss he had suffered on the contract plus a fee for the "risk and administrative costs created by the cancellation of the contract."
The memorandum also stated that each investor was required to have on deposit with GGS a sufficient amount to cover his investment risk which amount would vary with the size of the portfolio and the risk involved but the initial deposit would be a minimum of $ 10,000 or 0.125 percent of the face value of the portfolio, whichever was greater. An advisory fee of 0.001 percent per month was to be paid out of the deposit with GGS to GIM. In addition, an origination fee of 0.04 percent of the contract's face value was payable on the trade date, and the *975 fee for the cancellation of a contract was stated to be 0.02 percent of the face value on the cancellation date. GGS could also include a markup or a discount on any security covered by a contract.
Potential investors were warned by the disclosure memorandum that they could lose all of their deposit in a relatively short period of time and that in order to achieve a profit, the market would have to move in the direction forecast and by an amount that covered all fees*21 plus or minus any markup or discount.
GIM's disclosure memorandum contained 14 pages, 4 of which were devoted to the tax treatment that Mr. Gregory thought an investor could expect as a result of entering into a transaction with GGS and GIM. Briefly, the transaction would proceed as follows: (1) The investor would make his deposit and furnish GIM with an interest rate forecast for the next 3, 12, and 15 months. (2) Using the interest forecast GIM, acting as an investment adviser, would prepare a portfolio of forward contracts on Ginnie Maes and Freddie Macs in the face amount required by the deposit and which, if the investor's prediction proved to be correct, would supposedly result in a profit. (3) Each of the forward contracts was entered into by the investor with GGS. In each case, the original portfolio for an investor constituted a spread or straddle since 50 percent of the contracts were long positions (contracts to purchase securities) and 50 percent were short positions (contracts to deliver securities). (4) As time passed and it became apparent which leg of the straddle would result in a loss, *22 would be locked in by entering into an offsetting or opposing contract to purchase or sell until such time as the investor wished to realize his gain (presumably after it became a long-term capital gain).
According to GIM's memorandum, the tax result of the above transaction would be an ordinary loss for the investor in the year of the cancellation of the loss contracts and a long-term capital gain in the year the gain was realized by the sale or assignment of the gain contracts. The memorandum, however, did contain the following caveat:
*976 Due to the tax deferral and conversion of tax characteristics (i.e., capital versus ordinary) involved in the transactions described in this memorandum, the Service may take a strong stance contrary to the opinions expressed herein. Additional legislative action or Service rulings or regulations could also be*23 enacted or issued negating any tax benefits that would otherwise be available to the investor as discussed in this memorandum. Further, if a court should feel that tax deferral or conversion is involved, it might be inclined to hold in favor of the Service, even though the opinions expressed in this memorandum are technically correct. The investor should review the tax treatment of the transactions discussed in this memorandum with his tax advisor and rely only upon the advice of his own tax advisor. The opinions expressed herein are only for purposes of providing information and analysis to the investor and his tax advisor.
Attached to the disclosure memorandum is a copy of the Service's
Rev. Rul. 77-185, 1 C.B. 48">1977-1 C.B. 48 , 50. This ruling holds that "Neither a short-term capital loss created to minimize the tax consequences of an unrelated short-term capital gain through a series of transactions in silver futures contracts, which result in no real economic loss, nor the related out-of-pocket expenses incurred in connection with creating the loss are deductible under section 165(a) of the Code."In spite of the caveat, prospective investors*24 were advised that with a minimum deposit of $ 10,000 they could obtain forward contracts with GGS having a total face value of $ 8 million. They were also advised that for the minimum deposit, one or the other of the long or short positions (depending on the direction of the movement in the interest rate) would result in an ordinary loss in the approximate amount of 10 times the deposit or $ 100,000.
Each investor was required to sign a client or customer agreement which provided, among other things, that whenever GGS "considered it necessary for [its] protection," GGS could liquidate any open position or cancel any order through public or private action with or without notice to the investor; and in the event of death or incapacity of an investor, GGS could take any step it deemed appropriate to cancel or complete any open position. A power of attorney was also obtained from every investor. Under the power of attorney, GGS was authorized to follow the investment instructions of GIM in every respect, and GIM was authorized to act for the investor and perform in his behalf any act which he could perform in person. The power of *977 investor "[ratified] and [confirmed] any *25 and all transactions with [GGS] heretofore or hereafter made by [GIM] or for [his] account."
Even though GGS was a party to each of the forward contracts entered into by petitioners and had the right to include a markup or discount in any transaction, Mr. Gregory and David Solberg, the vice president and later president of GGS, admitted that neither GGS nor GIM made any profit from the contracts. Instead, their profits were generated from the advisory, origination, cancellation, and other fees.
GGS was required by the deputy corporation commissioner for the State of Oregon to establish and maintain a hedging program in publicly traded Ginnie Maes to insure its performance on forward contracts. GGS supposedly satisfied this requirement by hedging its net exposure on the total of its forward contracts by an offset with publicly traded Ginnie Maes. *26 Under the client agreement, GGS had the authority to determine any price required under the contracts including cancellation prices. In order to arrive at a price, GGS purportedly used an elaborate formula consisting of approximately 20 steps. The first step was the receipt of a quotation in the open market for the then-current 8-percent Ginnie Maes. This price was then converted to a yield stated as a percentage which was used in computing a comparable value for the security being priced. The formula contained several other adjustments to be made in arriving at a price for a contract. Surprisingly enough, these included a step which allowed GGS to make any adjustment it felt was appropriate. At trial, Mr. Gregory admitted that on more than one occasion price concessions had been made to an investor if he felt that the investor's pricing expectations would be "disappointed" by adhering too strictly to market quotations or pricing formulas.
*978 Following generally the procedure outlined in GIM's disclosure memorandum, petitioners and all other investors in the program made their respective deposits and furnished their interest forecasts to GIM and, in return, received documents*27 which indicated their entry into forward contracts with GGS to purchase and sell Ginnie Maes and Freddie Macs. The documents included copies of the interest forecasts, forward contracts, powers of attorney, and client agreements referred to in the memorandum. The documents consisted of standard preprinted forms provided by GIM, and no negotiation or alterations by the investors was permitted as to their terms except with respect to the interest forecasts. The forms were executed by the investors or were executed for them by GIM pursuant to the powers of attorney. For the most part, investors in the Gregory program first became aware of the terms of their contracts when they received the copies from GGS.
The interest rate forecasts made by petitioners for 1979 were as follows:
Brown Sochin Morgan Leinbach Date of forecast 10/03/79 09/18/79 09/28/79 10/03/79 Current rate 10.9 10.586 10.8 10.915 3 Months up 40 up 50 up 40 up 40 12 Months down 100 down 90 down 100 up 100 15 Months down 150 down 100 down 150 down 100 For illustration purposes, Brown's forecast which was made on October 3, 1979, was to the effect that the 10.9-percent rate at which 8-percent*28 Ginnie Maes were then trading on the Chicago Board of Trade would increase in 3 months by 40 basis points (0.04 percent), decrease in 12 months by 100 basis points (0.1 percent), and decrease in 15 months by 150 basis points (0.15 percent). Each of the other forecasts can be interpreted in a similar manner.
Each petitioner gave his 1979 forecast to GIM together with his 1979 deposit and, shortly thereafter, was furnished by GGS with a portfolio containing the forward contracts recommended by GIM, which according to GIM and GGS, would generate for petitioner a tax deduction of approximately $ 10 for each $ 1 of his deposit plus a gain if petitioner's interest forecast proved to be accurate.
Brown's account number with GGS was 135 and, according to the records of GGS, a transcript of the activity in the account *979 with respect to the 1979 investment is as shown in the table on page 980.
The above transcript of Brown's account purportedly indicates that in return for his $ 10,000 deposit the initial portfolio recommended by GIM for him contained forward contracts 1 to 7 (all dated October 4, 1979) of which the first three represented agreements by Brown to buy Ginnie Maes from*29 GGS having a total value of $ 4 million, and the last four of which represented agreements by Brown to sell to GGS Freddie Macs having a total value of $ 4 million. Six days later, on October 10, 1979, the contracts to buy Ginnie Maes (1 to 3) were canceled by GGS at an ordinary loss for Brown of $ 100,160 *30 RST was an investor with GGS and GIM and its members were business associates of Mr. Gregory. The assignment was executed for Brown by GIM under his power of attorney.
Sochin was a one-sixth participant in GGS's account number 112 which was in the name of Harsh Associates. GGS's transcript of the activity in the account with respect to the 1979 investment is as shown in table on page 981.
The transcript of the Harsh Associates account, in which Sochin was a one-sixth participant, purportedly indicates that for a deposit of $ 12,000 Harsh Associates received an initial portfolio containing forward contracts 1 to 7 (all dated September 18, 1979) of which the first three represented agreements by Harsh to buy from GGS Ginnie Maes having a total value of $ 4,800,000 and the last four represented agreements by Harsh to sell to GGS Freddie Macs having a total value of $ 4,800,000. Sixteen days later, on October 4, 1979, the contracts to buy Ginnie Maes were canceled and the contracts to sell $ 4,800,000 in Freddie Macs as represented by contracts 4 to 7 were offset *980
*311979 DENNIS S. BROWN Gregory Government Securities Account Number 135 Contract DSB Trade Settle Settle number buy/sell Amount Type date Percent date price 1 Buy 2.0 GNMA 10/04/79 7.5 3/10/81 78.464 2 Buy 1.0 GNMA 10/04/79 8.25 3/01/81 82.546 3 Buy 1.0 GNMA 10/04/79 9.0 3/30/81 84.943 4 Sell 1.0 FHLMC 10/04/79 8.75 3/15/81 84.025 5 Sell 1.0 FHLMC 10/04/79 9.0 4/01/81 84.443 6 Sell 1.0 FHLMC 10/04/79 9.25 2/15/81 85.416 7 Sell 1.0 FHLMC 10/04/79 9.5 3/01/81 86.365 8 Buy 4.0 FHLMC 10/10/79 8.0 4/15/81 78.500 9 Sell 4.0 FHLMC 10/26/79 8.0 5/15/81 74.9974 10 Buy 1.0 FHLMC 10/26/79 8.75 4/15/81 77.8633 11 Buy 1.0 FHLMC 10/26/79 9.0 5/01/81 78.3042 12 Buy 1.0 FHLMC 10/26/79 9.25 3/15/81 79.2472 13 Buy 1.0 FHLMC 10/26/79 9.5 4/01/81 80.1857
*9811979 DENNIS S. BROWN Gregory Government Securities Account Number 135 Contract DSB Disposition Disposition number buy/sell date price Gain/(loss) 1 Buy C 10/10/79 76.003 ($ 49,220) 2 Buy C 10/10/79 80.010 (25,360) 3 Buy C 10/10/79 82.385 (25,580) ($ 100,160) 4 Sell A 1/22/81 76.7572 72,678 5 Sell A 1/22/81 77.1969 72,461 6 Sell A 1/22/81 78.1425 72,735 7 Sell A 1/22/81 79.0841 72,809 8 Buy A 1/22/81 73.8769 (184,924) 9 Sell A 1/22/81 73.8769 44,820 10 Buy A 1/22/81 76.7572 (11,061) 11 Buy A 1/22/81 77.1969 (11,073) 12 Buy A 1/22/81 78.1425 (11,047) 13 Buy A 1/22/81 79.0841 (11,016) A net gain = 106,382 C + A net, net gain 6,222 Fees (6,100) Net profit to client 122
*321979 HARSH ASSOCIATES (James E. Sochin (1/6)) Gregory Government Securities Account Number 112 Contract JES Trade Settle Settle number buy/sell Amount Type date Percent date price 1 Buy 2.4 GNMA 9/18/79 7.5 3/10/81 80.515 2 Buy 1.2 GNMA 9/18/79 8.25 3/01/81 85.231 3 Buy 1.2 GNMA 9/18/79 9.0 3/30/81 87.047 4 Sell 1.2 FHLMC 9/18/79 8.75 3/15/81 86.140 5 Sell 1.2 FHLMC 9/18/79 9.0 4/01/81 86.547 6 Sell 1.2 FHLMC 9/18/79 9.25 2/15/81 87.531 7 Sell 1.2 FHLMC 9/18/79 9.5 3/01/81 86.513 8 Buy 4.8 FHLMC 10/04/79 8.0 4/15/81 80.563 9 Buy 1.2 FHLMC 10/23/79 8.75 4/15/81 76.704 10 Buy 1.2 FHLMC 10/23/79 9.0 5/01/81 77.1499 11 Buy 1.2 FHLMC 10/23/79 9.25 3/15/81 78.087 12 Buy 1.2 FHLMC 10/23/79 9.5 4/01/81 79.0193 13 Sell 4.8 FHLMC 10/23/79 8.0 5/15/81 73.8655 1979 HARSH ASSOCIATES (James E. Sochin (1/6)) Gregory Government Securities Account Number 112 Contract JES Disposition Disposition Gain/(loss) number buy/sell date price (JES share) 1 Buy C 10/04/79 78.056 ($ 9,836) 2 Buy C 10/04/79 82.662 (5,138) 3 Buy C 10/04/79 84.494 (5,106) ($ 20,080) 4 Sell A 12/17/80 76.4849 19,302 5 Sell A 12/17/80 76.9291 19,236 6 Sell A 12/17/80 77.8741 19,314 7 Sell A 12/17/80 78.8149 19,396 8 Buy A 12/17/80 73.6124 (55,605) 9 Buy A 12/17/80 76.4889 (430) 10 Buy A 12/17/80 76.9291 (442) 11 Buy A 12/17/80 77.8741 (426) 12 Buy A 12/17/80 78.8149 (409) 13 Sell A 12/17/80 73.6124 2,025 A net gain = 21,961 C + A net, net gain 1,881 Fees (1,420) Net profit to client 461 *982 by a contract to buy from GGS Freddie Macs in the amount of $ 4,800,000. On October 23, 1979, Harsh Associates' positions in the buy and sell contracts 4 to 8 were locked down by contract numbers 9 to 13. For his proportionate deposit of $ 2,000 Sochin claimed an ordinary loss from the October 4 cancellation*33 in the amount of $ 20,080. *34 1979), of which the first three represented agreements by them to buy from GGS Ginnie Maes having a total value of $ 28 million, and the last four represented agreements by them to sell to GGS Freddie Macs having a total value of $ 28 million. Eleven days later, on October 9, 1979, the contracts to buy Ginnie Maes were canceled by GGS and the $ 28 million in Freddie Macs which were included in sell contracts 4 to 7 were offset by contract 8 to buy from GGS Freddie Macs having a total value of $ 28 million. On October 22, 1979, RMC Associates' position in contracts 4 to 8 to buy and sell Freddie Macs was locked down by contracts 9 to 13. For his proportionate deposit of $ 22,000, Morgan claimed an ordinary loss from the October 9 cancellation in the amount of $ 219,340. *35 contracts to sell the Freddie Macs (4 to 13) were all purportedly disposed of at a net long-term capital gain to Morgan of $ 234,732 by an assignment to RST. The assignment was *983
1979 RMC ASSOCIATES (Ellison C. Morgan (31.43 percent)) Gregory Government Securities Account Number 127 Contract ECM Trade Settle Settle number buy/sell Amount Type date Percent date price 1 Buy 14.0 GNMA 9/28/79 7.5 3/10/81 79.169 2 Buy 7.0 GNMA 9/28/79 8.25 3/01/81 83.281 3 Buy 7.0 GNMA 9/28/79 9.0 3/30/81 86.678 4 Sell 7.0 FHLMC 9/28/79 8.75 3/15/81 84.763 5 Sell 7.0 FHLMC 9/28/79 9.0 4/01/81 85.178 6 Sell 7.0 FHLMC 9/28/79 9.25 2/15/81 86.156 7 Sell 7.0 FHLMC 9/28/79 9.5 3/01/81 87.125 8 Buy 28.0 FHLMC 10/09/79 8.0 4/15/81 79.219 9 Buy 7.0 FHLMC 10/22/79 8.75 4/15/81 78.2804 10 Buy 7.0 FHLMC 10/22/79 9.0 5/01/81 78.7205 11 Buy 7.0 FHLMC 10/22/79 9.25 3/15/81 79.6658 12 Buy 7.0 FHLMC 10/22/79 9.5 4/01/81 80.6065 13 Sell 28.0 FHLMC 10/22/79 8.0 5/15/81 75.3992 1979 RMC ASSOCIATES (Ellison C. Morgan (31.43 percent)) Gregory Government Securities Account Number 127 Contract ECM Disposition Disposition Gain/(loss) number buy/sell date price (ECM share) 1 Buy C 10/09/79 76.729 ($ 107,360) 2 Buy C 10/09/79 80.744 (55,814) 3 Buy C 10/09/79 83.125 (56,166) ($ 219,340) 4 Sell A 2/12/81 72.6893 265,621 5 Sell A 2/12/81 73.1436 264,757 6 Sell A 2/12/81 74.0681 265,934 7 Sell A 2/12/81 74.9890 266,992 8 Buy A 2/12/81 69.9127 (818,954) 9 Buy A 2/12/81 72.6893 (123,004) 10 Buy A 2/12/81 73.1436 (122,692) 11 Buy A 2/12/81 74.0681 (123,149) 12 Buy A 2/12/81 74.3830 (123,585) 13 Sell A 2/12/81 69.9127 482,812 A net gain = 234,812 C + A net, net gain 15,392 Fees (11,031) Net profit to client 4,361 *36 *984 executed for Morgan and the other members of RMC Associates by GIM under his power of attorney.
Leinbach's account number with GGS was 137 and the transcript of the activity in his account with respect to the 1979 investment is as shown in the table on page 985.
The transcript of Leinbach's account purportedly indicates that for his deposit of $ 20,000 he received an initial portfolio containing forward contracts 1 to 7 (all dated October 4, 1979), of which the first three represented agreements by him to buy from GGS Ginnie Maes having a total value of $ 8 million, and the last four represented agreements by him to sell to GGS Freddie Macs having a total value of $ 8 million. Fifteen days later, on October 19, 1979, the contracts to buy Ginnie Maes were canceled by GGS at an ordinary loss for Leinbach of $ 389,876 *37 at a net long-term capital gain to Leinbach of $ 403,148 by assignment to RST. The assignment was executed for Leinbach by GIM under his power of attorney.
Brown did not participate in the program after 1979, and Morgan did not participate in the program after 1980. Transcripts of Sochin's and Leinbach's accounts for the years 1980 and 1981 as well as a transcript of Morgan's account for 1980 are set out in the tables on pages 986-992.
The deposits made by Brown, Sochin (through Harsh Associates), Morgan (through RMC Associates), and Leinbach during 1979 were refunded to them before the end of 1979. The first 49 participants in the Gregory program generally were accorded the same treatment as these petitioners. In other words, in spite of any inconsistency in their interest forecasts, these first participants each received a *38 portfolio of contracts (many of which contained the same contracts as the portfolios received by other participants); shortly after receipt, the loss leg of each of their contract portfolios was canceled, generating the putative losses in issue; their deposits were refunded in *985
*391979 JAMES N. LEINBACH AND MARY ALICE LEINBACH Gregory Government Securities Account Number 137 Contract JNL Trade Settle Settle number buy/sell Amount Type date Percent date price 1 Buy 4.0 GNMA 10/04/79 7.5 3/10/81 78.464 2 Buy 2.0 GNMA 10/04/79 8.25 3/01/81 82.546 3 Buy 2.0 GNMA 10/04/79 9.0 3/30/81 84.943 4 Sell 2.0 FHLMC 10/04/79 8.75 3/15/81 84.025 5 Sell 2.0 FHLMC 10/04/79 9.0 4/01/81 84.443 6 Sell 2.0 FHLMC 10/04/79 9.25 2/15/81 85.416 7 Sell 2.0 FHLMC 10/04/79 9.5 3/01/81 86.365 8 Buy 8.0 FHLMC 10/19/79 8.0 4/15/81 76.1202 9 Sell 8.0 FHLMC 10/26/79 8.0 5/15/81 74.9974 10 Buy 2.0 FHLMC 10/26/79 8.75 4/15/81 77.8633 11 Buy 2.0 FHLMC 10/26/79 9.0 5/01/81 78.3042 12 Buy 2.0 FHLMC 10/26/79 9.25 3/15/81 79.2472 13 Buy 2.0 FHLMC 10/26/79 9.5 4/01/81 80.1857
*9861979 JAMES N. LEINBACH AND MARY ALICE LEINBACH Gregory Government Securities Account Number 137 Contract JNL Disposition Disposition number buy/sell date price Gain/(loss) 1 Buy C 10/19/79 73.6881 ($ 191,036) 2 Buy C 10/19/79 77.5936 (99,040) 3 Buy C 10/19/79 79.9534 (99,792) ($ 389,876) 4 Sell A 1/27/81 76.9008 142,484 5 Sell A 1/27/81 77.3399 142,062 6 Sell A 1/27/81 78.2864 142,592 7 Sell A 1/27/81 79.2286 142,728 8 Buy A 1/27/81 74.0168 (168,272) 9 Sell A 1/27/81 74.0168 78,448 10 Buy A 1/27/81 76.9008 (19,250) 11 Buy A 1/27/81 77.3399 (19,286) 12 Buy A 1/27/81 78.2864 (19,216) 13 Buy A 1/27/81 79.2286 (19,142) A net gain = 403,148 C + A net, net gain 13,272 Fees (12,660) Net profit to client 612
*401980 JAMES E. SOCHIN Gregory Government Securities Account Numbers 475 and 476 Contract JES Trade Settle Settle number buy/sell Amount Type date Percent date price 14 Buy 8.0 GNMA 6/17/80 9.25 3/15/82 91.8723 15 Sell 8.0 FHLMC 6/17/80 8.00 4/15/82 85.2462 16 Sell 8.0 FHLMC 6/20/80 9.25 2/15/82 91.7037 17 Sell 4.0 FHLMC 6/20/80 10.00 4/01/82 95.2781 18 Sell 4.0 FHLMC 6/20/80 10.25 4/01/82 96.5921 19 Buy 4.0 GNMA 6/20/80 10.50 3/01/82 99.4663 20 Buy 4.0 GNMA 6/20/80 11.25 3/01/82 103.3855 21 Buy 4.0 GNMA 6/23/80 10.75 5/01/82 99.4664 22 Buy 4.0 GNMA 6/23/80 11.00 5/01/82 100.7626 23 Buy 4.0 FHLMC 6/27/80 10.00 3/01/82 91.0065 24 Buy 4.0 FHLMC 6/27/80 10.25 3/04/82 92.2827 25 Sell 4.0 GNMA 6/27/80 10.75 4/01/82 96.3289 26 Sell 4.0 GNMA 6/27/80 11.00 4/01/82 97.5986
*9871980 JAMES E. SOCHIN Gregory Government Securities Account Numbers 475 and 476 Contract JES Disposition Disposition Gain/(loss) number buy/sell date price (JES share) 14 Buy A 1/26/82 67.7112 ($ 193,289) 15 Sell C 6/20/80 86.5457 (10,396) 16 Sell A 1/26/82 66.2112 203,940 17 Sell A 1/26/82 69.1602 104,472 18 Sell A 1/26/82 70.2305 105,446 19 Buy C 6/23/80 98.2301 (4,945) 20 Buy C 6/23/80 102.1184 (5,068) 21 Buy A 1/26/82 73.8699 (102,386) 22 Buy A 1/26/82 74.9386 (103,296) 23 Buy A 1/26/82 69.1915 (87,260) 24 Buy A 1/26/82 78.2618 (88,084) 25 Sell A 1/26/82 73.9011 89,711 26 Sell A 1/26/82 74.9698 90,515
*411980 JAMES K. SOCHIN Gregory Government Securities Account Numbers 475 and 476 Contract JES Trade Settle Settle number buy/sell Amount Type date Percent date price 27 Buy 4.8 GNMA 6/18/80 9.25 3/15/82 91.1182 28 Sell 4.8 FHLMC 6/18/80 8.00 4/15/82 84.5104 29 Buy 4.8 GNMA 6/25/80 8.00 5/15/82 84.9850 30 Sell 2.4 FHLMC 6/25/80 10.00 4/01/82 92.5946 31 Sell 2.4 FHLMC 6/25/80 10.25 4/01/82 93.8851 32 Buy 2.4 GNMA 6/25/80 10.50 3/01/82 96.7360 33 Buy 2.4 GNMA 6/25/80 11.25 3/01/82 100.5866 34 Sell 2.4 FHLMC 6/26/80 10.50 2/01/82 96.1113 35 Sell 2.4 FHLMC 6/26/80 11.25 2/01/82 99.9714 36 Sell 4.8 FHLMC 6/26/80 10.75 4/10/82 96.8381 37 Buy 4.8 GNMA 6/26/80 11.50 3/10/82 102.2525 38 Buy 4.8 GNMA 6/27/80 10.75 5/10/82 96.1418 39 Sell 4.8 FHLMC 6/27/80 11.00 4/20/82 96.4144 40 Buy 4.8 GNMA 6/27/80 11.75 3/20/82 101.7782 41 Buy 4.8 GNMA 6/30/80 11.00 5/20/82 96.2725 42 Sell 4.8 FHLMC 6/30/80 11.75 2/20/82 99.6082
*42 *9881980 JAMES K. SOCHIN Gregory Government Securities Account Numbers 475 and 476 Contract JES Modified Modified Disposition Disposition Gain/(loss) number buy/sell settle settle date price (JES share) date price 27 Buy N/A N/A C 6/25/80 90.5797 ($ 5,385) 28 Sell 8/15/83 84.7710 A 1/26/82 59.4013 253,696 29 Buy 9/15/83 85.2768 A 1/26/82 60.4325 (248,443) 30 Sell N/A N/A C 6/26/80 92.9634 (1,844) 31 Sell N/A N/A C 6/26/80 94.2571 (1,860) 32 Buy 7/01/83 96.9953 A 1/26/82 72.2121 (123,916) 33 Buy 7/01/83 100.8563 A 1/26/82 75.9531 (124,516) 34 Sell 6/01/83 96.3394 A 1/26/82 71.1809 125,792 35 Sell 6/01/83 100.2099 A 1/26/82 74.9219 126,440 36 Sell 8/10/83 97.1323 A 1/26/82 71.9106 252,216 37 Buy N/A N/A C 6/27/80 100.5140 (17,385) 38 Buy 9/10/83 96.4672 A 1/26/82 72.9418 (235,254) 39 Sell 8/20/83 96.7120 A 1/26/82 73.1434 235,685 40 Buy 7/20/83 102.0553 A 1/26/82 78.4774 (234,779) 41 Buy 9/20/83 96.6013 A 1/26/82 74.1746 (224,267) 42 Sell 6/20/83 99.8541 A 1/26/82 77.4462 224,079 A net gain = 45,502 C + A net (1,381) Fees (3,092) Net to client (4,473)
*431981 JAMES E. SOCHIN Gregory Government Securities Account Number 1293 Contract JES Trade Settle Settle number buy/sell Amount Type date Percent date price 43 Sell 2.5 FHLMC 3/31/81 8.25 4/01/83 72.1670 44 Sell 2.5 FHLMC 3/31/81 8.50 4/01/83 73.1076 45 Buy 2.5 GNMA 3/31/81 9.00 3/01/83 76.0284 46 Buy 2.5 GNMA 3/31/81 10.50 3/01/83 82.5329 47 Buy 2.5 FHLMC 4/02/81 8.25 5/01/83 72.2407 48 Buy 2.5 FHLMC 4/02/81 8.50 5/01/83 73.1787 49 Buy 2.5 FHLMC 4/08/81 9.00 3/01/83 73.2064 50 Buy 2.5 FHLMC 4/08/81 9.25 3/01/83 74.1241 51 Sell 2.5 GNMA 4/08/81 9.50 4/01/83 75.5695 52 Sell 2.5 GNMA 4/08/81 10.50 4/01/83 80.1516 53 Sell 2.5 GNMA 4/09/81 7.50 3/10/83 68.2401 54 Sell 1.25 GNMA 4/09/81 8.25 3/20/83 71.9577 55 Sell 1.25 GNMA 4/09/81 9.00 3/30/83 74.2777 56 Buy 1.25 FHLMC 4/09/81 8.75 3/15/83 73.2898 57 Buy 1.25 FHLMC 4/09/81 9.00 4/05/83 73.7465 58 Buy 1.25 FHLMC 4/09/81 9.25 2/15/83 74.6672 59 Buy 1.25 FHLMC 4/09/81 9.50 3/01/83 75.5843 60 Buy 2.5 GNMA 4/10/81 7.50 4/10/83 67.7494 61 Buy 1.25 GNMA 4/10/81 8.25 4/20/83 71.4289 62 Buy 1.25 GNMA 4/10/81 9.00 4/30/83 73.7400 63 Buy 5.0 FHLMC 4/10/81 8.00 4/08/83 69.0184 64 Sell 5.0 GNMA 4/10/81 9.25 3/08/83 74.1549 65 Sell 5.0 FHLMC 4/13/81 8.00 2/08/83 69.3536
*44 *9891981 JAMES E. SOCHIN Gregory Government Securities Account Number 1293 Contract JES Disposition Disposition Gain/(loss) number buy/sell date price (JES share) 43 Sell A 1/28/83 78.2089 ($ 48,335) 44 Sell A 1/28/83 79.4524 (50,758) 45 Buy C 4/02/81 75.5986 (3,438) 46 Buy C 4/02/81 82.0815 (3,611) 47 Buy A 1/28/83 78.7089 51,746 48 Buy A 1/28/83 79.9524 54,189 49 Buy P 4/09/81 73.6015 3,161 50 Buy P 4/09/81 74.5214 3,179 51 Sell P 4/09/81 75.9691 (3,197) 52 Sell P 4/09/81 80.5668 (3,322) 53 Sell A 1/28/83 75.5144 (58,194) 54 Sell A 1/28/83 79.2401 (29,130) 55 Sell A 1/28/83 83.0259 (34,993) 56 Buy C 4/10/81 72.2486 (4,165) 57 Buy C 4/10/81 72.7088 (4,151) 58 Buy C 4/10/81 73.6237 (4,174) 59 Buy C 4/10/81 74.5350 (4,197) 60 Buy A 1/28/83 76.0144 66,120 61 Buy A 1/28/83 79.7401 33,245 62 Buy A 1/28/83 83.5259 39,143 63 Buy A 1/28/83 77.4660 135,162 64 Sell C 4/13/81 75.0152 (13,768) 65 Sell A 1/28/83 76.9660 (121,798) A net gain = $ 36,397 C + A + P net (1,283) Fees (2,739) Net to client (4,022) 1980 JAMES N. LEINBACH AND MARY ALICE LEINBACH Gregory Government Securities Account Number 137 Contract JNL Trade Settle Settle number buy/sell Amount Type date Percent date price 14 Sell 12.0 FHLMC 6/19/80 8.0 4/15/82 85.7763 15 Buy 12.0 GNMA 6/19/80 9.25 3/15/82 92.4154 16 Buy 12.0 GNMA 6/25/80 8.0 5/15/82 85.4850 17 Sell 6.0 FHLMC 6/25/80 10.0 4/01/82 92.5946 18 Sell 6.0 FHLMC 6/25/80 10.25 4/01/82 93.8851 19 Buy 6.0 GNMA 6/25/80 10.50 3/01/82 96.7360 20 Buy 6.0 GNMA 6/25/80 11.25 3/01/82 100.5866 21 Sell 6.0 FHLMC 6/26/80 9.50 2/01/82 90.7602 22 Sell 6.0 FHLMC 6/26/80 10.75 2/01/82 97.2423 23 Sell 6.0 GNMA 6/27/80 10.50 4/01/82 95.6225 24 Sell 6.0 GNMA 6/27/80 11.25 4/01/82 99.4456 25 Buy 6.0 FHLMC 6/27/80 9.50 3/01/82 88.9952 26 Buy 6.0 FHLMC 6/27/80 10.75 3/01/82 95.3994 27 Buy 1.2 GNMA 12/12/80 11.25 2/01/82 86.5043
*45 *9901980 JAMES N. LEINBACH AND MARY ALICE LEINBACH Gregory Government Securities Account Number 137 Contract JNL Disposition Disposition number buy/sell date price Gain/(loss) 14 Sell A 1/25/82 62.0353 $ 2,848,920 15 Buy C 6/25/80 90.5797 (220,284) 16 Buy A 1/25/82 63.5353 (2,633,964) 17 Sell C 6/26/80 93.2964 (42,108) 18 Sell C 6/26/80 94.5931 (42,480) 19 Buy A 1/25/82 73.1644 (1,414,296) 20 Buy C 12/11/80 86.4730 (169,363) A 1/25/82 76.3791 (1,161,960) 21 Sell A 1/25/82 67.3718 1,403,304 22 Sell A 1/25/82 72.7368 1,470,330 23 Sell A 1/25/82 73.1331 1,349,364 24 Sell A 1/25/82 76.3478 1,385,868 25 Buy A 1/25/82 67.3406 (1,299,276) 26 Buy A 1/25/82 72.7056 (1,361,628) 27 Buy A 1/25/82 76.4103 (121,128) A net gain = $ 465,534 C + A net (8,701) Fees (20,380) Net to client (29,081
*461981 JAMES N. LEINBACH AND MARY ALICE LEINBACH Gregory Government Securities Account Number 137 Contract JNL Trade Settle Settle number buy/sell Amount Type date Percent date price 28 Sell 8.0 FHLMC 3/18/81 8.25 4/01/83 74.9370 29 Sell 8.0 FHLMC 3/18/81 8.50 4/01/83 75.8937 30 Buy 8.0 GNMA 3/18/81 9.00 3/01/83 78.8198 31 Buy 8.0 GNMA 3/18/81 10.50 3/01/83 85.4630 32 Buy 8.0 FHLMC 3/20/81 8.25 5/01/83 74.2269 33 Buy 8.0 FHLMC 3/20/81 8.50 5/01/83 75.1765 34 Buy 8.0 GNMA 3/26/81 7.50 3/10/83 69.3202 35 Buy 4.0 GNMA 3/26/81 8.25 3/20/83 73.0601 36 Buy 4.0 GNMA 3/26/81 9.00 3/30/83 75.3850 37 Sell 4.0 FHLMC 3/26/81 8.75 3/15/83 73.3992 38 Sell 4.0 FHLMC 3/26/81 9.00 4/05/83 73.8538 39 Sell 4.0 FHLMC 3/26/81 9.25 2/15/83 74.7779 40 Sell 4.0 FHLMC 3/26/81 9.50 3/01/83 75.6984 41 Sell 8.0 GNMA 3/30/81 7.50 4/10/83 69.2290 42 Sell 4.0 GNMA 3/30/81 8.25 4/20/83 72.9846 43 Sell 4.0 GNMA 3/30/81 9.00 4/30/83 75.3130 44 Buy 8.0 GNMA 3/30/81 9.50 3/01/83 77.6285 45 Buy 8.0 GNMA 3/30/81 10.50 3/01/83 82.2716 46 Sell 8.0 FHLMC 3/30/81 9.00 4/01/83 74.2484 47 Sell 8.0 FHLMC 3/30/81 9.25 4/01/83 75.1747 48 Buy 8.0 FHLMC 4/08/81 9.00 3/01/83 73.2064 49 Buy 8.0 FHLMC 4/08/81 9.25 3/01/83 74.1241 50 Sell 8.0 GNMA 4/08/81 9.50 4/01/83 75.5695 51 Sell 8.0 GNMA 4/08/81 10.50 4/01/83 80.1516 52 Sell 16.0 GNMA 4/10/81 9.25 3/08/83 74.1549 53 Buy 16.0 FHLMC 4/10/81 8.00 4/08/83 69.0184 54 Buy 16.0 GNMA 4/13/81 9.25 2/04/83 73.8634 55 Buy 8.0 FHLMC 4/13/81 9.00 3/01/83 71.9218 56 Buy 8.0 FHLMC 4/13/81 9.25 3/01/83 72.8322 57 Sell 8.0 GNMA 4/13/81 9.50 4/01/83 74.2704 58 Sell 8.0 GNMA 4/13/81 10.50 4/01/83 78.8013
*47 *9921981 JAMES N. LEINBACH AND MARY ALICE LEINBACH Gregory Government Securities Account Number 137 Contract JNL Disposition Disposition number buy/sell date price Gain/(loss) 28 Sell A 1/07/83 79.1865 ($ 339,960) 29 Sell A 1/07/83 80.4400 (363,704) 30 Buy C 3/20/81 77.6006 (97,536) 31 Buy C 3/20/81 84.1835 (102,360) 32 Buy A 1/07/83 79.6865 436,768 33 Buy A 1/07/83 88.9400 461,080 34 Buy A 1/07/83 76.9090 607,104 35 Buy A 1/07/83 80.7177 306,304 36 Buy A 1/07/83 84.5343 365,972 37 Sell C 3/30/81 73.8287 (17,180) 38 Sell C 3/30/81 74.2818 (17,120) 39 Sell C 3/30/81 75.2082 (17,212) 40 Sell C 3/30/81 76.1311 (17,308) 41 Sell A 1/07/83 76.4090 (574,400) 42 Sell A 1/07/83 80.2177 (289,324) 43 Sell A 1/07/83 84.0343 (348,852) 44 Buy P 4/02/81 77.4455 (14,640) 45 Buy P 4/02/81 82.0815 ($ 15,208) 46 Sell P 4/02/81 74.0674 14,480 47 Sell P 4/02/81 74.9926 14,568 48 Buy P 4/09/81 73.6015 31,608 49 Buy P 4/09/81 74.5214 31,784 50 Sell P 4/09/81 75.5691 (31,968) 51 Sell P 4/09/81 80.5668 (33,216) 52 Sell A 1/07/83 85.0065 (1,736,256) 53 Buy C 4/13/81 68.2503 (122,896) 54 Buy A 1/07/83 85.5065 1,862,896 55 Buy P 4/14/81 73.3502 114,272 56 Buy P 4/14/81 74.2687 114,920 57 Sell P 4/14/81 75.7149 (115,560) 58 Sell P 4/14/81 80.3027 (120,112) A net gain = $ 387,628 C + A + P net (13,056) Fees (28,660) Net to client (41,716) 1980 ELLISON C. MORGAN Gregory Government Securities Account Number 127 Contract ECM Trade Settle Settle number buy/sell Amount Type date Percent date price 14 Sell 15.0 FHLMC 6/17/80 8.00 4/15/82 85.5625 15 Buy 15.0 GNMA 6/17/80 9.25 3/15/82 92.1964 16 Sell 15.0 FHLMC 6/20/80 9.25 2/15/82 91.7037 17 Sell 7.5 FHLMC 6/20/80 10.00 4/01/82 95.2781 18 Sell 7.5 FHLMC 6/20/80 10.25 4/01/82 96.5921 19 Buy 7.5 GNMA 6/20/80 10.50 3/01/82 99.4663 20 Buy 7.5 GNMA 6/20/80 11.25 3/01/82 103.3855 21 Buy 7.5 GNMA 6/23/80 10.75 5/01/82 99.1273 22 Buy 7.5 GNMA 6/23/80 11.00 5/01/82 100.4206 23 BuY 7.5 GNMA 6/27/80 10.00 3/01/82 92.3731 24 Buy 7.5 GNMA 6/27/80 10.25 3/01/82 93.6522 25 Sell 7.5 FHLMC 6/27/80 10.75 4/01/82 95.6418 26 Sell 7.5 FHLMC 6/27/80 11.00 4/01/82 96.9144 1980 ELLISON C. MORGAN Gregory Government Securities Account Number 127 Contract ECM Disposition Disposition Gain/(loss) number buy/sell date price (ECM share) 14 Sell C 6/20/80 86.5457 ($ 147,480) 15 Buy A 2/08/82 65.2136 (4,047,420) 16 Sell A 2/08/82 63.7136 4,198,515 17 Sell A 2/08/82 66.9439 2,125,065 18 Sell A 2/08/82 68.1494 2,133,202 19 Buy C 6/23/80 97.8938 (117,937) 20 Buy C 6/23/80 101.7737 (120,885) 21 Buy A 2/08/82 72.0709 (2,029,230) 22 Buy A 2/08/82 73.2864 (2,035,065) 23 Buy A 2/08/82 68.0064 (1,827,502) 24 Buy A 2/08/82 69.2119 (1,833,022) 25 Sell A 2/08/82 71.0709 1,842,817 26 Sell A 2/08/82 72.2864 1,847,100 A net gain = $ 374,460 C + A net (11,842) Fees (13,900) Net to client (25,742) *48 *993 full; their gain legs (which were locked in) were carried on GGS' books for a period generally exceeding 16 months; and then their gain legs were assigned, which generated a credit to each participant's account that was set off against the loss (debit) generated by the earlier cancellation. Those participants who followed with GGS accounts numbered 150 and after were accorded the same treatment as the first participants except that they did not receive refunds of their deposits. *49 Mr. Gregory and an employee of GGS, was the principal stockholder and officer. Lyle Adams, another employee of GGS, was also an officer of NIG. GGS mailed the assignment documents to NIG at a mail drop established by NIG in Nevada; the documents were forwarded from there to Adams at his Portland residence.
GGS paid RST and NIG $ 100 for each assignment without regard to the amount of the contract. The assignment fee in each case was charged to the participant's account. The contracts were subsequently reassigned by RST and NIG to GGS at the same price as that used in the original assignment by the participant. As a result, neither RST nor NIG realized any income from the acquisition or the disposition of the contracts. In this connection, their income was limited to the $ 100 fees paid by GGS and charged to the participants. Furthermore, both the assignments to RST and NIG, as well as the reassignments by them to GGS, were handled by offsetting accounting entries of receivables and payables. In other words, other than the assignment fees for $ 100, no funds were exchanged with respect to the contracts at any time between the participants and RST or NIG on the original assignment*50 or between RST or NIG and GGS on the reassignments.
*994 After the reassignment of an investor's contracts by RST or NIG to GGS, the payable due from the investor as a result of the cancellation of his loss position was due to GGS. At the same time, the receivable in approximately the same amount due the investor as a result of the assignment of his gain position was due from GGS. At this point, the circle was completed and neither the investor, nor his assignee on the gain position (RST or NIG), nor GGS had realized any actual gain or loss on the contracts. The relatively minor net profits or net losses reflected by some of the transcripts of its accounts with petitioners were generated by GGS through "adjustments" to the cancellation prices and/or the assignment prices or, at times, by the failure of GGS to charge full transaction fees in accordance with the client agreements.
No Ginnie Maes or Freddie Macs were ever bought or sold with respect to any of the forward contracts to buy or sell such securities executed by GGS as one party, and executed by or for petitioners Brown, Sochin, Morgan, or Leinbach as the other party. In fact, the record does not contain any evidence*51 that any Ginnie Maes or any Freddie Macs were ever bought, sold, accepted, or delivered under any forward contract executed by GGS with any investor during the years 1979, 1980, and 1981. *52 forward contract is not a common practice by dealers in such contracts. For the most part, cancellations are used by such dealers only to correct errors.
Petitioner Dennis S. Brown is the sole stockholder and principal officer of an employment agency which he started in *995 1968. Prior to his investment in Gregory Government Securities, he had speculated in interest-rate futures offered by Merrill Lynch. He learned about Mr. Gregory from his accountant in October of 1979, and shortly thereafter attended a meeting with Mr. Gregory with his accountant and several other clients of his accountant.
On or about October 4, 1979, Mr. Brown deposited $ 10,000 with GGS. The deposit was refunded to him before the end of 1979. He was advised that before the end of 1979 he had realized an ordinary loss from GGS in the amount of $ 106,160 which he deducted on his 1979 return. He understood that in 1981 he had a long-term capital gain from the assignment of the remainder of his portfolio with GGS in the amount of $ 106,382 which he reported on his 1981 income tax return.
In 1979, 1980, and 1981, petitioner James E. Sochin was employed by Harsh Investment Corp. as a vice president in charge*53 of its hotel operations division. He first heard about Mr. Gregory through Harold Schnitzer, who was the owner of Harsh Investment Corp. Through a meeting arranged by Mr. Schnitzer, Mr. Sochin attended a conference with Mr. Gregory in which he explained the portfolio structure and how interest rate movements affected security prices. After this meeting and on or about September 18, 1979, Mr. Sochin contributed $ 2,000 toward the total $ 12,000 deposited with GGS by Harsh Associates; Sochin and the other Harsh Associates received full refunds of their deposits before the end of 1979. He was later advised that he had an ordinary loss in 1979 of $ 20,621 which he reported on his 1979 income tax return. In 1980, he was advised that he had an ordinary loss on his GGS transactions in the amount of $ 48,054 and a long-term capital gain in the amount of $ 21,142, both of which he reported on his 1980 return. In 1981, he deducted an ordinary loss in the amount of $ 38,785 and reported a long-term capital gain in the amount of $ 44,804 from his GGS transactions.
At the time of trial, Ellison C. Morgan was 47 years of age. During 1979, 1980, and 1981, he was the president of Resource *54 Management Consultants which designs and markets executive compensation plans, places loans for savings and loan associations, and through a separate company, designs and markets life insurance products through about 50 distributors. From about 1971 through about 1982, he invested regularly *996 and extensively in futures contracts. For example, during this period he bought, sold, and otherwise dealt in futures contracts in sugar, cattle, hopps, copper, corn, wheat, Deutsche marks, Swiss francs, bean oil, Canadian dollars, gold, treasury bills, and treasury bond. He had also dealt in Ginnie Maes and Freddie Macs.
Mr. Morgan first met Mr. Gregory while he was a partner with Arthur Andersen. They first met professionally when Mr. Gregory did some estate and financial planning for some of Mr. Morgan's clients and partners. Some time later in 1979, Mr. Morgan met on several different occasions with Mr. Gregory in order to learn about the promotion known as Gregory Government Securities. During these conversations and later conversations which he had with his own attorney, Mr. Morgan was made to understand that there was no guarantee against losses in case an investment was made*55 in the program, and there was no guarantee of any gains. He did understand that an investment would result in a tax writeoff during the first year of approximately 10 to 1. He also understood that his initial deposit would be returned during the first year.
Mr. Morgan understood that he would simply furnish Mr. Gregory with an interest forecast and that Mr. Gregory would handle all of the necessary transactions through his two corporations. He was later advised that the transactions resulted in an ordinary loss during 1979 in the amount of $ 224,416, which he claimed on his 1979 income tax return. He also claimed a deduction for investment advice in the amount of $ 357. His deposit was also refunded to him before the end of 1979. In 1980, he was advised that he had an ordinary loss from his GGS transactions in the amount of $ 390,614 which he deducted on his 1980 return. On his 1981 income tax return, he reported a long-term capital gain from GGS transactions in the amount of $ 234,518, which he understood was the final result of his 1979 portfolio. He was later advised that he had a long-term capital gain in 1982 from his 1980 portfolio, but he did not report the 1982 gain*56 because respondent in the meantime had audited his earlier returns and had disallowed the losses claimed therein.
Petitioner James N. Leinbach is a professional engineer, having received a composite degree in civil, electrical, and *997 mechanical engineering from the University of Portland in 1951. Upon receipt of his engineering degree, he went to work for a construction firm by the name of Slate-Hall as an assistant engineer. In 1961 he became a partner, and by 1979 he owned 50 percent of the firm which was then known as the Fred H. Slate Co. The company is primarily engaged in the construction of highways, but builds some dams. Prior to 1979, Mr. Leinbach had made personal investments in bonds, common stocks, and preferred stocks. Some of his investments were exempt from State income tax.
In or about September of 1979, Mr. Leinbach learned of the GGS program. Shortly thereafter, he and his accountant and his partner attended a meeting with Mr. Gregory. As a result of the meeting, Mr. Leinbach understood that the program involved mortgages secured by the Government and he also understood that there were a number of advantages including the possibility of a profit and*57 a considerable tax loss in the first year.
In 1979, he made a deposit of $ 20,000 with GGS. The deposit was refunded to him before the end of the year. On his income tax return for 1979, Mr. Leinbach reported income in the amount of $ 427,681 from his partnership and deducted a loss in the amount of $ 394,376 on his GGS transactions. On his 1980 income tax return, Mr. Leinbach reported income from the partnership and other sources of $ 536,507 and deducted an ordinary loss from GGS transactions in the amount of $ 482,245. On his income tax return for 1981, Mr. Leinbach reported a long-term capital gain from the GGS transactions in the amount of $ 401,464 and an ordinary loss from the same transactions in the amount of $ 401,412. On his 1982 tax return, Mr. Leinbach reported a long-term capital gain from GGS transactions in the amount of $ 461,444. *58 OPINION
1. Losses on Forward Contracts The central issue in these cases is whether the losses claimed by petitioners are bona fide or whether they are based *998 upon an elaborate sham. Respondent contends that the losses were generated in form without any substance, that the underlying transactions were fictitious, and that such transactions existed only within the GGS computer. On the other hand, petitioners contend that the losses were genuine and were the result of bona fide transactions entered into for profit under section 165(c)(2) and are clearly allowable under section 108 of the Tax Reform Act of 1984, Pub. L. 98-369, 98 Stat. 680, or the standard laid down in
Smith v. Commissioner , 78 T.C. 350 (1982)Section 165(a) allows a deduction for a loss sustained during the taxable year that is not compensated for by insurance or otherwise. In the case of individuals, however, the deduction is limited to losses incurred in a trade or business, in a transaction entered into for profit, or as the result of a casualty or theft. Sec. 165(c). In any event, to be deductible, the claimed loss must be the result of a bona fide transaction, and*59 substance, not mere form, shall be the determining factor.
Sec. 1.165-1(b), Income Tax Regs. SeeGregory v. Helvering , 293 U.S. 465">293 U.S. 465Respondent's determination that the underlying transactions are not bona fide is presumptively correct; and petitioners have the burden of proof.
Welch v. Helvering , 290 U.S. 111">290 U.S. 111New Colonial Ice Co. v. Helvering , 292 U.S. 435">292 U.S. 435A careful review of the voluminous record leads us to the inescapable conclusion that petitioners have failed to establish that the transactions leading to their alleged losses were bona fide. In fact, from the record as a whole, we are satisfied that petitioners have failed to establish that the entire program from which the losses allegedly arose did not exist solely to provide tax benefits for its investors.
All of the forward contracts promoted by Mr. Gregory were between GGS, as one party, and one petitioner or some other participant, as the other party. Furthermore, each petitioner as well as all other participants executed a power of attorney which authorized GGS and/or GIM to execute*60 and perform any act for the investor with respect to the contracts that GGS and GIM deemed expedient and at a price determined by GGS and adjusted for any reason which GGS considered appropriate. In addition, an ultimate profit obviously could be, and at times *999 was to a nominal extent, manipulated by GGS merely by foregoing a part of the fees cited in the disclosure memorandum or by utilizing its pricing formula.
These cases are analogous to, if not factually indistinguishable from, the situation recently considered by us in
Julien v. Commissioner , 82 T.C. 492 (1984)Julien v. Commissioner, supra Julien , we stated at page 508:*61 It seems self-evident that, in any commodity straddle, a legitimate investor must have some potential of making money as a result of various market forces and, by the same token, be [at] risk of losing money. One commentator has said that "A commodity straddle is held in the expectation of profiting from a change in the 'spread' or 'premium', the difference in price between two futures contracts. While the price movements of the two contracts will have some relationship to each other, as the prices will be affected by similar economic conditions, neither in theory nor in practice are the fluctuations identical." See R. Dailey, "Commodity Straddles in Retrospect: Federal Income Tax Considerations,"
47 Brooklyn L. Rev. 321 (Winter, 1981) . Presumably, fluctuations would also occur in a case where the investor holds silver bullion against a forward contract, if the end result were not, as here, prearranged.In
Falsetti v. Commissioner , 85 T.C. 332">85 T.C. 332The facts before us are also somewhat similar to those described in
United States v. Winograd , 656 F.2d 279">656 F.2d 279United States v. Turkish , 623 F.2d 769 (2d Cir. 1980)United States v. Siegel , 472 F. Supp. 440">472 F. Supp. 440We conclude, therefore, that the losses claimed by petitioners are not allowable because the disputed transactions constituted factual shams which were inspired, designed, and executed by Mr. Gregory and the two corporations controlled by him for the sole purpose of attempting to achieve tax losses for their investors.
Smith v. Commissioner, supra Miller v. Commissioner , 84 T.C. 827">84 T.C. 827Forseth v. Commissioner , 85 T.C. 127">85 T.C. 127Magin v. Commissioner , T.C. Memo 1985-304">T.C. Memo. 1985-3042. Fees Paid With Respect to Forward Contracts Fees paid by petitioners to GGS were paid so that they could participate in Gregory's program. Inasmuch as we have found that the program was operated solely to provide tax deductions for its participants, the fees constituted payments to purchase such deductions and as such are, at best, personal expenditures which are not deductible under section 162 or section 212.
Zmuda v. Commissioner , 79 T.C. 714">79 T.C. 714731 F.2d 1417">731 F.2d 1417 (9th Cir. 1984);Houchins v. Commissioner , 79 T.C. 570">79 T.C. 570Falsetti v. Commissioner , 85 T.C. 332">85 T.C. 332*1001
3. Additions to Tax Under Section 6653(a) Respondent determined that an addition to tax is due from petitioners Ellison C. and Linda Morgan for negligence under
section 6653(a) . In view of our finding hereinbefore that the underlying transactions were in fact shams, and in view of our subsequent finding that petitioner Ellison C. Morgan knew or should have known at the time that they*65 were shams, it is apparent that he ignored applicable law and regulations in the preparation of his returns. Consequently, respondent's determination that additions to tax are due from Ellison C. Morgan undersection 6653(a) is sustained.4. Damages Under Section 6673 Finally, we turn to respondent's request that damages be imposed against petitioners in each of these cases under section 6673. With respect to this issue and from the record as a whole, we are satisfied that, in spite of their protestations to the contrary, petitioners Dennis S. Brown, James E. Sochin, Ellison C. Morgan, and James N. Leinbach were mature, well-educated, and well-read individuals who were sufficiently knowledgeable and sophisticated with respect to business and tax matters to have known, and actually did know, at the time the disputed transactions were entered into, that the transactions were "too good" to be real and therefore were shams. However, transactions involving forward contracts and especially forward contracts entered into with respect to Ginnie Maes and Freddie Macs are extremely complicated and, during the years under consideration, were relatively new. Furthermore, from the time*66 the petitions were filed in these cases up to and after the date of trial, the law with respect to tax straddles was uncertain. See
Miller v. Commissioner , 827">84 T.C. 827Forseth v. Commissioner , 85 T.C. 127">85 T.C. 127Julien v. Commissioner , 82 T.C. 492 (1984)Gregory v. Helvering , 293 U.S. 465">293 U.S. 465Higgins v. Smith , 308 U.S. 473">308 U.S. 473Knetsch v. Commissioner , 364 U.S. 361 (1960)272 F.2d 200">272 F.2d 200 (9th Cir. 1959). We hereby serve notice, however, that henceforth we will have no such reluctance with respect to petitioners who file petitions or maintain positions based upon*67 transactions which they knew or reasonably should have known to be factual shams.We feel that such action is warranted because Congress is concerned with the substantial increase in the number of petitions pending before the Tax Court and especially those petitions based upon frivolous or groundless claims. The concern of Congress in this connection is apparent from the Conference report on the consideration of section 6621(d)(4) dealing with increased interest on substantial underpayments attributable to tax motivated transactions. There it is stated:
The conferees note that a number of the provisions of recent legislation have been designed, in whole or in part, to deal with the Tax Court backlog. Examples of these provisions are the increased damages assessable for instituting or maintaining Tax Court proceedings primarily for delay or that are frivolous or groundless (sec. 6673), the adjustment of interest rates (sec. 6621), the valuation overstatement and substantial understatement penalties (secs. 6659 and 6661), and the tax straddle rules (secs. 1092 and 1256). * * *
The conferees believe that, with this amendment, the Congress has given the Tax Court sufficient tools to*68 manage its docket, and that the responsibility for effectively managing that docket and reducing the backlog now lies with the Tax Court. The positive response that the Court has made to several recent GAO recommendations is encouraging and the conferees expect the Court to implement swiftly these and other appropriate management initiatives. The conferees also note favorably the steps the Court has begun to take in consolidating similar tax shelter cases and dispensing with lengthy opinions in routine tax protester cases. The Court should take further action in these two areas, as well as to assert, without hesitancy in appropriate instances, the penalties that the Congress has provided.
[H. Rept. 98-861 (Conf.) (1984), 1984-3 C.B. (Vol. 2) 1, 239.]
Our own concern for the continuing increase in the number of petitions based upon frivolous or groundless claims has been clearly expressed in such opinions as
Sydnes v. Commissioner , 74 T.C. 864">74 T.C. 864While in the past we have been reluctant to impose damages in cases involving persons other than those who were merely protesting the Federal tax laws, *69 we think the imposition of damages in the circumstances here is fully warranted. Moreover, since the statute does not restrict us to those *1003 cases in which a party has requested us to impose damages, we think we should do so, on our own motion, where the facts and circumstances so dictate.
Here, the Court and respondent have been required to consider the same issue twice after it had already been decided by this Court and affirmed by the Court of Appeals. Petitioners with more genuine controversies have been delayed while we considered these cases involving the same issue. In these circumstances, the petitioner, an accountant with some knowledge of the Federal tax laws, cannot and has not shown that he, in good faith, has a colorable claim to challenge the Commissioner's determination. Indeed, he knew when he filed the present case with this Court that he had no reasonable expectation of receiving a favorable decision. No reasonably prudent person could have expected this Court to reverse itself in this situation.
In
Oneal v. Commissioner , 84 T.C. 1235">84 T.C. 1235We have frequently found *70 that cases based upon meritless contentions and stale arguments are burdensome both on this Court and upon society as a whole. See
Abrams v. Commissioner , 82 T.C. 403 (1984)Upon review of this record, we find that petitioners' positions are frivolous and groundless and that this proceeding was instituted and maintained primarily for delay. We admonish other petitioners and their counsel not to maintain frivolous proceedings before this Court or to maintain them primarily for delay.
Again, in
Abrams v. Commissioner , 82 T.C. 403">82 T.C. 403Edwards v. Commissioner , 680 F.2d 1268">680 F.2d 1268, 1271 (9th Cir. 1982)"Meritless appeals of this nature are becoming increasingly burdensome on the federal court system.
We find this appeal frivolous .Fed. R. App. P. 38 , and accordingly award double costs to appellee [the Commissioner of Internal Revenue]. * * * [Citations omitted; emphasis added in 82 T.C.]"Accord
McCoy v. Commissioner , 696 F.2d 1234">696 F.2d 123476 T.C. 1027">76 T.C. 1027 (1981);Barmakian v. Commissioner , 698 F.2d 1228">698 F.2d 1228Martindale v. Commissioner , 692 F.2d 764">692 F.2d 764It is now certain that all Courts will no longer tolerate the filing of frivolous appeals. On June 13, 1983, the Supreme Court, for the first time, invoked the provisions of its
rule 49.2 , which the Court adopted in 1980, and ordered an appellant to pay damages for bringing a frivolous appeal. InTatum, Elmo C. v. Regents of Nebraska-Lincoln *72 (No. 82-6145), the Court issued the following order: "The motion of respondents for damages is granted and damages are awarded to respondents in the amount of $ 500.00 pursuant toSupreme Court Rule 49.2 ."The direction of this nation's highest court is crystal clear -- that no court should permit frivolous or groundless appeals, not only in discrimination suits but in any other area of litigation, including Federal income taxation. The language of amended section 6673 is equally clear.
[Fn. refs. omitted.]
Finally, in
Elliott v. Commissioner , 84 T.C. 227">84 T.C. 227Abrams v. Commissioner , 82 T.C. 403">82 T.C. 403Decisions will be entered under Rule 155 .Footnotes
1. Cases of James E. Sochin, docket No. 2313-83; Ellison C. Morgan and Linda Morgan, docket No. 3083-83; and James N. Leinbach and Mary Alice Leinbach, docket No. 3503-83, were consolidated herewith for trial, briefing, and opinion.↩
2. Since Linda Morgan and Mary Alice Leinbach are petitioners solely because they filed joint returns with their husbands, the word "petitioners" as used hereinafter will refer only to the male petitioners unless otherwise indicated.↩
3. All section references are to the Internal Revenue Code of 1954 as amended and in effect during the years in issue. All rule references are to the Tax Court Rules of Practice and Procedure.↩
4. The use in our findings of such words and phrases as loss, gain, forward contract, cancellation, assignment, spread, straddle, short position, long position, transactions and similar words and phrases are for convenience only and are not to be construed as a determination of the nature of any act or thing.↩
5. The additional loss issue raised by petitioner Morgan in his amended pleading filed Apr. 19, 1984, was not considered herein because these proceedings deal only with the issues common to all petitioners. The additional issue will be considered in a later proceeding.↩
6. At trial and on brief, petitioners contended that evidence of transactions between Mr. Gregory, GGS, or GIM and any investor other than petitioners is not relevant to the issues under consideration and therefore should not be admitted. After due consideration, we affirm the temporary decision made at the trial that such evidence is admissible in order to determine whether the transactions with petitioners are bona fide.↩
7. Everything else being equal, any significant change either up or down in the prevailing interest rate would result in a gain in one leg and a loss in the other.↩
8. GIM's disclosure memorandum contains the following provision on the risk of non-performance:
"Government Securities' [GGS's] ability to perform its obligation on settlement date will depend on the financial condition of Government Securities. Government Securities attempts to limit its economic risk by hedging its forward contract positions with either offsetting sales to or purchases from other customers. To the extent that Government Securities may have an imbalance between its long and its short positions (i.e., its net exposure), it will attempt to minimize that risk with offsetting purchases or sales of GNMA securities or GNMA futures contracts."↩
9. The record does not contain an explanation for the difference between this figure and the figures used on the return and the statutory notice, both of which reflect a loss of $ 106,160.↩
10. The record does not contain an explanation for the difference between this figure and the figures used on the return and the statutory notice, both of which reflect a loss of $ 20,621.↩
11. The record does not contain an explanation for the difference between this figure and the figures used on the return and the statutory notice, both of which reflect a loss of $ 224,416.↩
12. The record does not contain an explanation for the difference between this figure and the figures used on the return and the statutory notice, both of which reflect a loss of $ 394,676.↩
13. In or about November of 1979, full refunds of deposits ceased.↩
14. There is some evidence that a single such transaction was entered into with respect to litigation pending in another court after 1981.↩
15. An amended return was filed for 1981 and 1982 as a protective claim for refund of the reported gain because the Commissioner on audit disallowed the GGS losses previously reported.↩
16. In view of our finding with respect to the sham issue, we need not consider the other contentions advanced by respondent with respect to the losses.↩
17. See also
Stafford v. Commissioner , T.C. Memo. 1983-650Vickers v. Commissioner , T.C. Memo. 1983-429↩18. See also
Snyder v. Commissioner , T.C. Memo. 1985-9Barnard v. Commissioner , 731 F.2d 230">731 F.2d 230Fox v. Commissioner , 80 T.C. 972↩ (1983)
Document Info
Docket Number： Docket Nos. 29929-82, 2313-83, 3083-83, 3503-83
Citation Numbers： 85 T.C. 968, 1985 U.S. Tax Ct. LEXIS 6, 85 T.C. No. 57
Judges： Shields,Simpson,Goffe,Chabot,Nims,Whitaker,Korner,Hamblen,Cohen,Clapp,Jacobs,Wright,Parr,Williams,Wilbur,Swift,Gerber
Filed Date： 12/18/1985
Precedential Status： Precedential
Modified Date： 10/18/2024