DocketNumber： Docket No. 20724-83
Citation Numbers： 84 T.C. 827, 1985 U.S. Tax Ct. LEXIS 83, 84 T.C. No. 55
Judges： Whitaker,Fay,Sterrett,Goffe,Wilbur,Nims,Korner,Hamblen,Cohen,Clapp,Gerber,Nims,Wilbur,Whitaker,Hamblen,Cohen,Simpson,Dawson,Chabot,Shields,Swift,Jacobs,Wright,Dawson,Chabot,Shields,Swift,Wright,Swift,Dawson,Chabot,Shields
Filed Date： 5/13/1985
Status： Precedential
Modified Date： 11/14/2024
*83
*827 Respondent determined a deficiency in income tax for petitioners' 1979 taxable year in the amount of $ 104,236. Due to concessions, the sole issue for determination is the deductibility of short-term losses in the amount of *828 $ 103,325 from trading in commodity futures straddles claimed on Schedule D of petitioners' income tax return.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. Throughout the year 1979, petitioners were husband and wife, although they are now divorced. At the time of the filing of the petition in this case, each of petitioners was a resident of the State of Colorado. *87 futures trading is necessary. *88 In general, a futures contract is an agreement to deliver or to receive a specified quantity and grade of a designated commodity during a designated month in the future (a position). *829 holder. In a straddle, by contrast, the holder is concerned only with changes in the spread -- the difference between the price of each leg of the straddle. If the prices of the short and long legs of the straddle move exactly in tandem so that the spread does not change, the holder will suffer no economic consequence since the unrealized gain and loss will be exactly offset. On the other hand, if the spread widens or narrows, the holder will incur either an economic net gain or loss.
Whenever any leg of a straddle is closed out by the purchase of an exactly opposite position, tax consequences normally will result, either a realized gain or loss. *89 If no other action is taken, where the straddle consisted of only two positions, that position which was not closed out becomes simply an open contract. In straddle trading, however, and particularly in tax-motivated straddle trading, customarily the loss leg will be closed out in order to realize a tax loss and a similar position acquired in a different month so that the economic consequences and risks to the holder are minimized. This substitution of one position for a similar position in a different month is sometimes referred to as a "switch."
Straddle transactions having as their principal objective the achievement of "deferral" (postponing to a later year an already realized gain in an unrelated transaction) or "conversion" (changing a short-term capital gain on an unrelated transaction to a long-term capital gain) are commonly referred to as "tax straddles" by the brokerage industry. Trading in tax straddles will always show a pattern of switching of the loss leg in the initial year in order to generate tax losses (which are utilized to offset the realized unrelated gain) while minimizing economic losses. Long-term capital gains are achieved by holding the profit position*90 (if a long position) for more than 6 months prior to closeout. *830 time reduces the profit opportunities. Every position held by a person is matched by an exactly opposite position (or series of positions) held by one or more other persons. Thus, a loss realized on closeout will be matched by the realization of gain in the same amount, provided the opposite position was*91 acquired at the same time and held to close out.
Beginning in 1971, Merrill Lynch Pierce Fenner & Smith, Inc. (Merrill Lynch), which as broker handled petitioners' trades which are in issue, formed in its New York City office a unit within its commodity division referred to as the "Tax Straddle Department," *92 graduate with a degree in geology, and for approximately 20 years his principal income-producing activities have been in various aspects of oil and gas exploration. Since the year 1964, petitioner has been actively trading for his own account in commodity futures. Petitioner has always used what is known as a nondiscretionary account with his brokers, in that investment decisions were and are made by him personally. Petitioner generally acquired open positions and rarely held any position for a substantial period of time. In 1969, petitioner and several other individuals formed a corporation called Computrade, Inc., to engage in commodity futures trading on a large scale. This continued until 1974 or 1975, and during the initial years, petitioner personally handled the corporation's trading activities. Computrade, Inc., made more than 1,000 trades in a variety of futures contracts, all of which were open positions. *831 was a sophisticated trader in commodity futures transactions, with the knowledge, experience, and confidence to make futures trading decisions on the basis of his own analysis of facts and on recommendations solicited by *93 him from brokers and their account executives. It was petitioner's practice when "playing" commodities to check on his positions at a minimum every day, because it "is a very high-risk game."
During the period 1975 to 1983, petitioner made 158 commodity futures trades for his personal account -- almost 20 per year. Of these, 114 were open positions and 44 were straddles. Of the 44 straddles, only 4 included switches. Three of these four are the transactions at issue here -- gold futures straddle trades made between October 19, 1979, and April 21, 1980. *94 These trades are set forth in detail in Appendix A (pp. 848-849
A number of facts are of particular significance in this case. Prior to the initiation of petitioner's gold futures trades, Mathers had never consulted with or utilized the expertise of the Merrill Lynch Tax Straddle Department for the benefit of *832 petitioner (or any other customer), and he did not utilize the Tax Straddle Department for petitioner's trades after this series of gold straddles. Moreover, it was only with respect to these gold futures trades that Mathers used a New York specialist to place the trades with a floor broker at the Commodity Exchange, Inc. Mathers, himself, placed all of petitioner's other futures trades with a floor broker. At some point shortly before the first gold straddle trade on October 19, 1979, Mathers talked to O'Hare and was referred to Shevlin for expert assistance. *96 Shevlin prior to submission of the recommendation to petitioner for approval. Shevlin's recommendations were either volunteered by him to Mathers or solicited by Mathers and conveyed to petitioner by Mathers. *97 tax objective was known to petitioner and had his approval, although whether the precise sum of $ 100,000 was suggested by petitioner or by Mathers or by Shevlin is unclear. infra), the series of switches effected during December *833 1979 created $ 103,325 of tax straddle losses which were included in the $ 99,708 net short-term commodity losses claimed by petitioner on his 1979 tax return. The series of gold futures straddle transactions ending in April 1980 resulted in an overall net loss for the 6-month period of slightly over $ 25,000. Petitioner's series of switches are typical of tax straddles. We note particularly that the initial long position of 15 August 1980 contracts which showed a continuing gain was held for 6 months and 2 days, providing a long-term capital gain. All of the switches, on the other hand, were in petitioner's short positions in order to recognize losses.
*98 The initial gold straddle transaction of petitioner on October 19, 1979, was placed and approved by petitioner with the primary intent or motive of realizing tax losses in 1979 in an amount approximating $ 100,000 and long-term capital gains in 1980. It was contemplated by petitioner, Mathers, and Shevlin at the time of placing the order to acquire the October 19, 1979, position that one or more switches would be effected in order to realize the desired 1979 tax loss goal. Thus, the October 19, 1979, transaction was a part of and the initial step in petitioner's "entire commodity tax straddle scheme," designed to achieve the 1979 tax loss goal and the deferral to 1980 of unrelated 1979 capital gains. We assume that petitioner had an incidental profit motive, but it is more realistic to conclude -- as we do -- that he intended that the long-term gain which he expected to realize by holding the long element of the initial straddle would allow him to offset the realized losses and transaction costs. *99 to achieve the tax loss thereby realized. Each new straddle simultaneously acquired was tax motivated and each reduced the profit potential. However, gain or loss in each position depended upon market movement over which these players had no control.
Interest rates and the prices of gold and gold futures were exceedingly high during this 1979-80 period. Upon the date on which each separate gold straddle was acquired by petitioner, it was reasonable to believe that the prices of gold and hence *834 gold futures, would fall instead of continuing to rise. A relatively small downward movement in the prices of gold and gold futures during the 1979-80 period involved in petitioner's gold futures trades could have produced a net economic profit, after taking into account transaction costs and fees, on each separate straddle on the respective dates on which each position was closed*100 out, including the final closeout of all positions on April 21, 1980. In that event, the 1979 net loss shown in Appendix A would have been converted into a net gain. Therefore, there was for each of petitioner's 1979 gold straddles a reasonable prospect of some profit at the time acquired.
OPINION
Were it not for the interpretative problem created by the application to this case of section 108 of the Tax Reform Act of 1984 (section 108),
For purposes of applying
*835 The mere fact that petitioners may have had a strong tax-avoidance purpose in entering into their commodity tax straddles does not in itself result in the disallowance of petitioners' losses under
[Contemporary] evidence, we think, belies any nontax motive on petitioners' part.
[
But for section 108, on the authority of
Petitioner, here, insists that he initiated his gold transactions with a profit objective, thinking in 1979 that both gold prices and interest rates would go down. In point of fact, exactly the opposite happened. It is probably true that petitioner, a sophisticated commodity futures trader, hoped that in some fashion he might make an overall profit or at least break even. Petitioner's entire business life, during which his principal activity has been oil and gas exploration, has many aspects of professional gambling. We are convinced that petitioner had at least an incidental profit motive in every business transaction which he entered including these gold straddles, but his contention that he was unaware of, or indifferent to, the tax consequences of the switches in positions made in December 1979 is simply not believable. Petitioner's intelligence, his experience in commodity futures trading, and his sophistication as a businessman and commodities trader belie his efforts to convince us that he was not fully aware that realization of a tax loss during the year*104 1979 was the primary motive for his entering into this series of gold straddle transactions. *836 we do not doubt his testimony that he had no contact with Shevlin prior to trial preparation, we cannot and do not credit the implication from his testimony that he was unaware that the advice he received from account executive Mathers was derived from the Merrill Lynch Tax Straddle Department and was geared toward achievement of a $ 100,000 tax loss during the last quarter of 1979. We are certain that Shevlin would not have established the $ 100,000 loss objective without being convinced by Mathers that it represented this customer's goal. We are further convinced that the relationship of Mathers and petitioner was such that Mathers would not have conveyed such information to Shevlin without petitioner's knowledge and concurrence. Mathers was simply the go-between, conveying the tax straddle expert's recommendations to petitioner and petitioner's authorization to Shevlin.
*105 The pattern of switches in these gold commodity futures transactions, totally different from petitioner's trading pattern during the prior 15 years, is too significant to ignore. The self-serving testimony *837 petitioner may have had, the record here mandates our finding that petitioner's gold trades here in issue were primarily tax motivated. That*106 is crystal clear on this record. It is not merely coincidental that the same tax straddle department which worked for petitioner, here, also effected the tax losses for the petitioners in
Having determined that under
(a) General Rule. -- For purposes of the Internal Revenue Code of 1954, in the case of any disposition of 1 or more positions -- (1) which were entered into before 1982 and form part of a straddle, and (2) to which the amendments made by title V of the*107 Economic Recovery Tax Act of 1981 do not apply,
(b) Presumption That Transaction Entered Into for Profit. -- For purposes of subsection (a), any position held by a commodities dealer or any person regularly engaged in investing in regulated futures contracts shall be rebuttably presumed to be part of a transaction entered into for profit.
[Tax Reform Act of 1984, Pub. L. 98-369, sec. 108, 98 Stat. 630.]
The applicability of section 108 is clear. The losses in question were incurred during 1979 in the disposition of "1 or more positions" which were entered into in that year and to which the amendments made by title V of the Economic Recovery Tax Act of 1981 do not apply. *838 That critical phrase -- "transaction entered into for profit" -- is identical with the language of *110 Section 108 had no precise counterpart either in the House or the Senate versions of the bill; the only legislative history available is the Conference Committee report, *839 Accordingly, * * * the conference agreement provides that a loss on the disposition of a position entered into before 1982 will be allowed, except to the extent nonrecognition is required under any applicable provision, if the position is part of a transaction entered into for profit. * * * The loss generally will be allowed for the taxable years in which the position is disposed of. * * * * * *In determining whether the position is part of a transaction entered into for profit, it is intended that the provision be applied by treating the condition as satisfied In the case of commodity dealers and persons actively engaged in investing in RFC's the provision is to be applied by presuming that the position is held as part of a transaction entered into for profit unless the Internal Revenue Service establishes to the contrary. In determining whether a taxpayer is actively engaged in trading*111 in RFC's with an intent to make a profit, a significant factor will be the extent of transaction costs. If they are sufficiently high relatively to the scope of the taxpayer's activities that there is no reasonable possibility of a profit, the presumption will be unavailable. * * * [Emphasis supplied.] Section 108 was adopted after the submission of this case following extensive trial but prior to briefing. The parties have not called to our attention any case and we are unaware of any which under these circumstances would preclude the application of this new statute to the case at bar. Smith and *113 The narrow question before us is whether or not we are to apply to this case the test of The regulations state that section 108 of the Act does not change*114 the standard for allowance of losses under The construction by the regulations that section 108 of the Act does not change the for-profit standard derives from the use in both that section [and [Emphasis supplied.] On brief, respondent insists that section 108 simply adopted existing*115 law. He argues that the statute is not intended to grant amnesty to all pre-ERTA *841 of any profit" as imposing a more stringent test than The mere fact that section 108 uses *116 the same verbiage as When testing a regulation, we apply well-established rules as set forth in our recent decision in Although regulations are entitled to considerable weight, "respondent may not usurp the authority of Congress by adding restrictions to a statute which are not there." [ The legislative history makes *119 it clear that Congress was aware of the Commissioner's litigating position on straddles and of our decision in We hold that section 108 adopts an objective test and directs that losses be allowed on the disposition of a position if that particular straddle transaction can be said to have held "a reasonable prospect of any profit" at the time the straddle was acquired. The temporary regulations are plainly inconsistent with section 108 as so construed in accordance with its legislative history; the regulations insofar as they adopt the *843 To apply the objective test of section 108, we must first determine what was intended by the terms "transaction" and "position." Although not free from doubt, we believe that the term "transaction" should be deemed to refer to each separate straddle when, as here, that analysis is feasible. We recognize, *121 however, that there may be circumstances where factually or otherwise it would be difficult or unduly burdensome to apply this straddle-by-straddle analysis. In those cases, the Unquestionably, the use of the word "any" in this phrase was intended by Congress to have meaning. This is confirmed by the direction in the Conference agreement to compare the profit potential with the transaction costs. The phrase "any profit," therefore, requires some prospect for dollar gain over cash investment plus transaction costs. However, the profit potential need not equate with, relate to, or exceed some arbitrary percentage of the investment, whether investment is defined as the total initial margin, the aggregate margin cost, *844 the face value of any single position acquired, or the aggregate*123 face value of all the positions comprising the straddle determined as of the date acquired. Finally, whether or not the prospect of any profit is reasonable is tested on a facts and circumstances basis in the context of the futures market for the particular commodity at the time the trades are made. Thus, the final question to ask is whether the particular straddles here involved had a reasonable prospect of any profit in the then-existing market. On this record, we simply cannot determine whether the prospect for a profit from these straddles in a rising market was a reasonable one. If, however, the market had reversed its course, one of respondent's experts is in agreement with petitioner's expert that profits were foreseeable from these straddles. *124 Respondent, on the authority of It is not clear from these regulations how respondent defines*126 a transaction with "sufficient substance" so that the transaction would be recognized for Federal income tax purposes. Such language could be construed as adopting the economic substance theory of When there are at least two constructions of ambiguous language in a regulation, one of which is consistent and one inconsistent with the statute, the regulations should be upheld by adopting that interpretation of the language which is consistent with the intent underlying the statute. Appendix A Appendix A appears on pages 848 and*129 849. *847 Appendix B Temporary Income Tax Regulations (1.165-13T) relating to straddles entered into before the effective date of the Economic Recovery Tax Act of 1981. The following questions and answers concern the treatment of losses on certain straddle transactions entered into before the effective date of the Economic Recovery Tax Act of 1981, under the Tax Reform Act of 1984 (98 Stat. 494). Q-1 What is the scope of section 108 of the Tax Reform Act of 1984 (Act)? A-1 Section 108 of the Act provides that in the case of any disposition of one or more positions, which were entered into before 1982 and form part of a straddle, and to which the provisions of Title V of the Economic Recovery Act of 1980 (ERTA) do not apply, any loss from such disposition shall be allowed for the taxable year of the disposition if such position is part of a transaction entered into for profit. For purposes of section 108 of the Act, the term "straddle" has the meaning given to such term by Q-2 What transactions are considered entered into for profit? A-2 A transaction is considered entered into for profit if the transaction is entered into for profit within the meaning of
It is worth noting that these regulations were issued as temporary regulations because of the "need for immediate*118 *842 guidance." That need obviously involved a number of pending cases, including this one, where respondent was engaged in litigation over straddle losses. There is at least some question whether a regulation issued to buttress respondent's litigating position is entitled to any special presumption of validity. See, e.g.,
*131 APPENDIX A Chart V Gilbert R. Miller Gold Commodity Transactions 1979 through 1980 Current Gain (loss) Contracts balance claimed on June 80 Aug. 80 Oct. 80 Dec. 80 long/(short) tax return 1979 Transactions Initial transaction 10/19/79 Trade 15 (15) Position 15 (15) 15-(15) N/A First Transaction 12/3/79 Trade (7) 7 Position 15 (7) (8) 15-(15) (22,340.50) Second transaction 12/4/79 Trade (8) 8 Position 15 (15) 0 15-(15) (24,012.00) Third transaction 12/13/79 Trade (5) 15 (10) Position (5) 15 0 (10) 15-(15) (56,972.50) (103,325.00) 1980 Transactions Fourth transaction 3/7/80 Trade (5) 5 Position (10) 15 0 (5) 15-(15) (80,207.50) (183,532.50) Final transaction 4/21/80 Trade 10 (15) 5 Position 0 0 0 0 0-(0) 157,905.00 (25,627.50) APPENDIX A Chart V Gilbert R. Miller Gold Commodity Transactions 1979 through 1980 Calculated unrealized Unrealized gain (loss) gain (loss) Net equity date in account in account 1979 Transactions Initial transaction 10/19/79 Trade Position 150 (1,845.00) First Transaction 12/3/79 Trade Position 12/3/79 21,820 (2,515.50) Second transaction 12/4/79 Trade Position Third transaction 12/13/79 Trade Position 12/13/79 99,100 (6,220.00) 1980 Transactions Fourth transaction 3/7/80 Trade Position 3/7/80 159,750 (25,777.50) Final transaction 4/21/80 Trade Position 4/21/80
*850 Nims,
It was my privilege to express the unanimous views of this Court in
If the practical effect in honoring the clearly expressed will of Congress is to grant amnesty to pre-1981 commodity tax straddlers, so be it. It is certainly not the proper function of this or any other Court to subvert the will of Congress by substituting the personal preferences of the Judges, and the majority prudently has not done so.
Simpson,
Section 108 provides that any loss from the disposition of a position forming part of a straddle*134 entered into before 1982, and to which the amendments made by title V of the Economic Recovery Tax Act of 1981 (ERTA) do not apply, "shall be allowed for the taxable year of the disposition
In light of these cases, when Congress used the phrase "transaction entered into for profit" in section 108, its well-established meaning must have been evident to those working with the statute. We must presume that Congress intended such*137 phrase to have the same meaning when used in section 108.
In explanation of the purposes of section 108, the Statement of the Managers provides in relevant part:
The conferees believe it is inappropriate to prolong the uncertainty with respect to the treatment of losses claimed with respect to straddle positions for periods prior to 1981. Accordingly, in lieu of the Senate amendment's requirement of a report with respect to pre-1981 cases, the conference agreement provides that a loss on the disposition of a position entered into before 1982 will be allowed, *138 except to the extent nonrecognition is required under any applicable provision, if the position is part of a transaction entered into for profit. This treatment applies where the position is part of a straddle as defined in
* * * In determining whether the position is part of a transaction entered into for profit, it is intended that the provision be applied by treating the condition as satisfied if there is a reasonable prospect of any profit from the transaction.
In the case of commodity dealers and persons actively engaged in investing in RFCs, the provision is to be applied by presuming that the position is held as part of a transaction entered into for profit*139 unless the Internal Revenue Service establishes to the contrary. In determining whether a taxpayer is actively engaged in trading in RFCs with an intent to make a profit, a significant factor will be the extent of transaction costs. If they are sufficiently high relatively to the scope of the taxpayer's activities that there is no reasonable possibility of a profit, the presumption will be unavailable. * * *
[H. Rept. 98-861 (1984), 1984-3 C.B. (Vol. 2) 1, 171.]
The statement reveals that Congress wishes to put an end to the litigation over tax straddles, and to accomplish that end, it adopted two new statutory rules: (1) It rejected the Commissioner's position and provided that the disposition of a loss leg of a straddle constitutes a closed and completed transaction for purposes of
The majority focuses on the phrase "reasonable prospect of any profit" and concludes that such language establishes a new "for profit" test. The majority first examines the words "any profit" and says "The phrase 'any profit,' therefore, requires some prospect for dollar gain over cash investment *854 plus transaction costs." In connection with "reasonable prospect," the majority states at page 844:
Finally, whether or not the prospect of any profit is reasonable is tested on a facts and circumstances basis in the context of the futures market for the particular commodity at the time the trades are made.
* * * On this record we simply cannot determine whether*141 the prospect for a profit from these straddles in a rising market was a reasonable one. If, however, the market had reversed its course, one of respondent's experts is in agreement with petitioner's expert that profits were foreseeable from these straddles. There is every reason to believe, as we do, that each of the straddles to be tested here had when acquired a reasonable prospect for profit and there is no evidence to the contrary. * * * [Fn. ref. omitted.]
The majority had already concluded that the petitioner's trading strategy was predicated on an assumption that the gold market would rise; yet, the majority declined to inquire as to whether, in such a market, the prospect of profit would be reasonable. Since some experts expected the market to fall, there was the possibility of a profit, and apparently, that possibility was sufficient to convince the majority that there was a "reasonable prospect" of a profit.
Such interpretation is not compelling. The dictionary defines "prospect" as an "act of looking forward; anticipation, foresight." Webster's Third New International Dictionary (1981). Yet, in the statute, "prospect" is modified by "reasonable." It is not enough*142 to anticipate or foresee some profit; that anticipation must be reasonable. We cannot determine the reasonableness of a prospect without some inquiry into the likelihood that it will occur. Can we say that a prospect is reasonable when the petitioner, an experienced trader in commodity futures, his Merrill Lynch advisers, and many market experts expected that it would not occur? The use of "reasonable" reveals that Congress had in mind more than the mere possibility; an unlikely possibility cannot be said to be reasonable. It appears that the majority has totally ignored the requirement of "reasonable" in its interpretation.
Furthermore, if the majority's interpretation is adopted, the presumption contained in section 108(b), which was enacted to provide special relief to dealers in tax straddles, is unnecessary. In virtually every tax straddle, there will exist the possibility of a profit, and therefore, under the majority's interpretation, all traders in tax straddles will receive tax *855 relief, thereby eliminating the need for a presumption in favor of dealers. In addition, if we conclude that Congress meant to reject the definition of the "for profit" test in
Aside from the Statement of the Managers in the Conference Committee report, the managers of the legislation, Chairman Rostenkowski of the Ways and Means Committee and Senator Dole, Chairman of the Finance Committee, offered no further explanation of the scope or effect of section 108. However, Senator Howard Metzenbaum, of Ohio, spoke out about section 108:
the effect of that provision is virtually to preclude the IRS from pursuing tax cases against about 200 traders of commodity futures for an estimated $ 300 million in taxes that the IRS is trying to collect from traders who used the now outlawed tax avoidance scheme known as a commodity straddle.
As a matter of fact, the IRS preliminary data indicates that there are 4,400 cases presently pending in [the] Tax Court representing $ 500 million in taxes before interest*144 is assessed. The IRS has assessed deficiencies for 15,000 taxpayers for $ 1.5 billion. There is no data on how many professional traders are involved, but we do know that whether it is $ 300 million or $ 500 million or a substantial amount more, the commodity traders and dealers were well taken care of in the conference committee * * *
[11 Cong. Rec. S8390 (daily ed. June 27, 1984).]
Similarly, Richard L. Ottinger, a Representative from New York, stated on July 24, 1984, that "This tax break [provided by section 108] has been afforded to 200 or so commodity traders in Chicago at a cost of $ 300 million to the Government." 12 Cong. Rec. E3251 (daily ed. July 24, 1984). Mr. Ottinger also inserted into the Congressional Record an article from the Washington Post of July 2, 1984, in which the author stated that:
Rostenkowski's bailout means that two taxpayers who arranged virtually identical commodity deals to avoid paying taxes will be treated differently.
Ordinary investors will have to show they were trying to make money, not simply create losses to claim as tax deductions. But thanks to Rostenkowski, "professional commodity traders and persons who regularly trade commodity*145 futures contracts" will be presumed to have a profit motive.
*856 In many cases that distinction will mean the brokers who invented this tax dodge will get away with using it, but their clients will have to pay taxes.
[12 Cong. Rec. E3251 (daily ed. July 24, 1984).]
These statements by Senator Metzenbaum and Representative Ottinger do reflect the contemporaneous understanding of what Congress was doing by the enactment of section 108. Congress realized that it was extending substantial tax relief to dealers in tax straddles, but these statements make it indisputably clear that Congress had no understanding that it was granting tax relief to all traders in tax straddles with a consequent loss in revenue exceeding $ 1.5 billion. The outcry by the critics of the legislation would, no doubt, have been substantially greater had they understood that the legislation was extending tax relief to all traders of tax straddles.
Nearly 100 years ago, the Supreme Court observed:
These cases show the principle upon which is founded the rule that a claim for exemption from taxation must be clearly made out. Taxes being the sole means by which sovereignties can maintain their existence, any*146 claim on the part of any one to be exempt from the full payment of his share of taxes on any portion of his property must on that account be clearly defined and founded upon plain language. There must be no doubt or ambiguity in the language used upon which the claim to the exemption is founded. It has been said that a well founded doubt is fatal to the claim; no implication will be indulged in for the purpose of construing the language used as giving the claim for exemption, where such claim is not founded upon the plain and clearly expressed intention of the taxing power. [
Over the intervening years, this proposition has been repeatedly embraced and applied by the Supreme Court.
Dawson,
This case is a prime example of why simplification and reform of our Federal income tax laws are needed. *148 If my analysis of the majority opinion is correct, I think the implications of the opinion are startling and wrong. If, as the majority concludes, the scope of section 108 of the Tax Reform Act of 1984 was intended to grant amnesty to all pre-ERTA commodity straddles, then perhaps Mr. Bumble was right. unequivocal evidence of legislative purpose to the contrary. The majority's strained construction of section 108 will impede *858 the countdown*149 for abusive tax shelters. The result, as I see it, is tax shelter relief run riot.
It is inconceivable to me that, in the Tax Reform Act of 1984, Congress would provide the Internal Revenue Service with new and strong enforcement tools to crack down on abusive tax shelters, *150 economically motivated.
I dissent because, in my judgment, the majority has chosen a wrong and tortuous path.
Swift,
As we recently stated --
The starting point for interpreting a statute is the language of the statute itself. E.g.,
Thus, in considering herein the interpretation and significance to be given the relevant language from the Conference Committee report, the question should be asked whether the apparent focus of that language on what may happen in the marketplace (as distinct from the focus of the statutory language on the individual investor's specific motive in entering into a particular straddle transaction) represents such a significant departure from the statutory language that the language of the Conference Committee report must be disregarded absent a clearer and unequivocal statement from Congress that that departure was intended.
For the reasons set forth herein, and in the dissenting opinions of Chief Judge Dawson and Judge Simpson, I respectfully dissent.
1. Mr. Miller at the time of trial was a resident of California.↩
2. The mechanics of trading through the Commodity Exchange, Inc., in commodity futures is discussed in detail in our decision in
3. The word "position" is of particular importance in the application of sec. 108 of the Tax Reform Act of 1984 which is dispositive of this case.↩
4. For definitional purposes, it is immaterial whether the delivery month of the long position or of the short position is nearer to the date of acquisition of the straddle.↩
5. Long-term capital gains can be achieved only through a long position. Short-term capital gains on a short position cannot be converted into long-term capital gains because of the anti-conversion rules set forth in sec. 1233(b). Thus the maximum tax advantage is achieved where gain is on the long position and loss on the short.↩
6. This department was apparently also known as the Financial Services Department.↩
7. On this record, we cannot determine how many of these trades were handled by petitioner personally, but the utilization of only open positions clearly was consistent with and must have reflected petitioner's personal trading philosophy.↩
8. The numbers of trades, straddles, and switches during the period 1975-83 were stipulated. Since the terms "transaction" and "trade" were not defined, we cannot determine definitively what portion of the 44 straddles the gold straddles here in issue represent. (See note 13
9. Margin is the amount of money or collateral required to be deposited by a customer with his broker when trading in commodity futures is initiated. It does not constitute a part payment on the purchase price of the futures contracts acquired but rather serves to insure the brokers against loss incurred in the futures trading. The original margin amount is fixed by the particular exchange through which the trading is effected. In all cases, margin is substantially less than the aggregate cost of the initial positions. Additional margin may be required, or refunds may be made, to offset unrealized economic losses or gains incurred during trading. Generally, the amount of required original margin is greater for trades in open futures contracts than in straddles since the risk is substantially greater. As a result, profit or loss may be measured or tested against the aggregate margin deposited -- the money required to engage in the trading -- as well as against the cost of the futures contracts acquired.↩
10. Mathers now recalls only that O'Hare had a reputation for expertise in commodity futures trading, including straddles, and that O'Hare's department was involved in gold straddles. Why he felt impelled in this instance to consult with the Tax Straddle Department, he could not satisfactorily explain. However, throughout his testimony, Mathers' memory was poor, conveniently so, it would seem.↩
11. Petitioner had no direct contact with Shevlin until the time of trial preparation and no contact at all with O'Hare.↩
12. Although petitioner strenuously denies tax motivation as well as knowledge of this tax objective, his denials are not credible. There was a substantial similarity between the trades executed by petitioner and those of a number of the other customers of the Tax Straddle Department. In particular, a number of the other customers of this department also made petitioner's initial transaction on the same date, though in different units. Petitioner's gold straddle trades were contrary to his customary trading practice of acquiring open positions, and his use of switches in every one of this series of gold trades is almost unique in petitioner's commodity futures trading. Finally, the retention by petitioner of a single position for 6 months was without precedent. There is no satisfactory explanation for these uncustomary futures trades other than that they reflect the tax strategy of the Merrill Lynch Tax Straddle Department and were designed to achieve the $ 100,000 tax loss objective.↩
13. Commissions and fees of $ 3,447.50 were paid by petitioner to Merrill Lynch in connection with the gold futures straddles in issue.↩
14. Division A of the Deficit Reduction Act of 1984, 98 Stat. 494.↩
15. All section references, with the exception of sec. 108, are to the Internal Revenue Code of 1954 as amended and in effect during the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
16. As a witness, we found petitioner to be neither forthright nor convincing. His answers to many questions put to him by his own counsel, on cross-examination and by the Court, were ambiguous often with an appearance of a studied attempt at confusion. The following colloquy between the Court and petitioner is illustrative:
Q. And it is on account of those factors that you found it necessary to change your position more frequently in gold?
A. Well, I really didn't think I changed it that -- You know, obviously, when you compare this -- This is an unusual time that I'm doing this. In other words, World War III is almost to start. I mean, I'm in -- they're just different from most of the others. I mean, the Iranian crisis, the Afghanistan crisis, gold is all at once making severe moves that it has never done historically. Interest rates are going out of sight. I'm making changes.
Obviously, the thing that I should have done is just reverse my position rather than to start hedging down. All of these moves are kind of hedges down. It's all hindsight now, but I should have completely reversed it, and then I would have made a substantial profit out of the thing.↩
17. Greater weight is to be accorded objective facts than self-serving statements as to intent.
18. In addition to the briefs of the parties, we have considered the brief amicus curiae of Dorchester Partners and Edward O. and Vivian S. Thorp filed by leave of the Court on Sept. 25, 1984. The arguments advanced in said brief were effectively presented by petitioners in this case and, therefore, will not be separately addressed in this opinion.↩
19. This provision is effective as to transactions like those at issue here which were entered into after June 23, 1981.↩
20. Our obligation to look at legislative history is aptly stated in
"Petitioner's contention that section 392 is clear and unambiguous is evidently aimed at preventing the Court from looking to the legislative history of that section and those related to it. * * * Furthermore, it is now established beyond successful challenge that a court may seek out any reliable evidence as to legislative purpose regardless of whether the statutory language appears to be clear. [
21. H. Rept. 98-861 (Conf.) (1984), 1984-3 C.B. (Vol. 2) 1, 171.↩
22. With respect to subsec. (b) of sec. 108, the retroactive application of the presumption in favor of "any person regularly engaged in investing in regulated futures contracts" can pose at least theoretical difficulties. This case was tried without knowledge of this provision and therefore without specifically taking into account the presumption. Although neither party has sought to reopen the record, both parties argued this presumption issue on brief. Without belaboring the point, the transactions in issue here are regulated futures contracts and our findings make it appear that petitioner would be a person regularly engaged in investing in such contracts. On the other hand, it is far from clear that under respondent's temporary regulations (
23.
24. These two words appear in the printed version of
25. Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172.↩
26. We note that here as in
27. Mr. Rostenkowski submitted the Conference report on H.R. 4170 to the House of Representatives on Friday, June 22, 1984, whereas our opinion in
28. Since a position is disposed of by the acquisition of the opposite position -- one unit long January 1986 is disposed of by acquiring, i.e., selling, one unit short January 1986 -- this matching or offsetting position is to be ignored.↩
29. Dr. Roger Gray, one of respondent's expert economists, testified that during the October 1979 -- April 1980 period, opinion was split as to the direction which gold futures prices would take. Hence a straddle investment strategy predicated on the assumption that prices would decline was reasonable. Dr. Gray described petitioner's prospect for profits in a declining market as "modest." Respondent's second expert testified, as did other witnesses, that the switches reduced the profit potential. That at least implies the possibility of some profit.↩
30. The complete version of answer 2 of
31. An appeal in this case would be to the 10th Circuit.↩
32. The new butterfly straddle acquired on Dec. 13, 1979, composed of 5 June 1980, 15 August 1980, and 10 December 1980, is not required to be tested in this case since the switch realizing a loss occurred in 1980. However, on the record before us, it is not inappropriate to note that the profit circumstances for this straddle do not appear to differ substantially from petitioner's two other gold straddles discussed in the text.↩
1. Represents total loss on Gold Transactions -- includes $ 3,447.50 in Commissions and Fees paid.↩
2. Includes amounts of commission required to close all positions.↩
1. In his radio address on Apr. 13, 1985, the President said the Federal tax system is "a complicated, frustrating, unfair mystery of legalistic gobbledygook and loopholes never designed, it seems, to help everyday wage earners, only those who can afford high-priced attorneys and accountants." To that I would add: Simplification and reform of the Federal tax system are long overdue.↩
2. "If the law supposes that," said Mr. Bumble * * * "the law is a ass, a idiot." C. Dickens, Oliver Twist, ch. 51.↩
3. See, for example, the following compliance provisions of the Tax Reform Act of 1984 with respect to tax shelters: (1) Sec. 141 relating to the registration of tax shelters; (2) sec. 142 requiring promoter lists; (3) sec. 143 increasing the penalty for promoting abusive tax shelters and providing for injunctions against aiding and abetting the understatement of tax liability; and (4) sec. 144 increasing the rate of interest for tax-motivated transactions. It is significant that a "tax motivated transaction" includes "any straddle." The majority opinion in this case acknowledges that "petitioner's gold trades here in issue were primarily tax motivated."↩
Knetsch v. United States , 81 S. Ct. 132 ( 1960 )
United States v. American Trucking Associations , 60 S. Ct. 1059 ( 1940 )
george-s-munson-and-katharine-s-munson-v-edgar-a-mcginnes-individually , 283 F.2d 333 ( 1960 )
Helvering v. Northwest Steel Rolling Mills, Inc. , 61 S. Ct. 109 ( 1940 )
Ewing v. Commissioner of Internal Revenue , 213 F.2d 438 ( 1954 )
Consumer Product Safety Commission v. GTE Sylvania, Inc. , 100 S. Ct. 2051 ( 1980 )
Bank of Commerce v. Tennessee Ex Rel. Memphis , 16 S. Ct. 456 ( 1896 )
Helvering v. Stockholms Enskilda Bank , 55 S. Ct. 50 ( 1934 )
Karl F. Knetsch and Eva Fay Knetsch v. The United States , 348 F.2d 932 ( 1965 )
United States v. Stewart , 61 S. Ct. 102 ( 1940 )
Herman Landerman v. Commissioner of Internal Revenue , 454 F.2d 338 ( 1971 )
Helvering v. National Grocery Co. , 58 S. Ct. 932 ( 1938 )
Commissioner v. Jacobson , 69 S. Ct. 358 ( 1949 )
United States v. Turkette , 101 S. Ct. 2524 ( 1981 )
New Colonial Ice Co. v. Helvering , 54 S. Ct. 788 ( 1934 )
State of Washington v. Commissioner of Internal Revenue , 692 F.2d 128 ( 1982 )
United Telecommunications, Inc. (Formerly United Utilities, ... , 589 F.2d 1383 ( 1978 )
J. C. Penney Company, Transferee v. Commissioner of ... , 312 F.2d 65 ( 1962 )
Commissioner v. South Texas Lumber Co. , 68 S. Ct. 695 ( 1948 )
sheldon-e-friedman-debby-b-friedman-zell-c-hurwitz-myrna-hurwitz-alvin , 869 F.2d 785 ( 1989 )
William F. Wehrly and Elizabeth Ann Wehrly v. United States , 808 F.2d 1311 ( 1986 )
Robert Demartino, Appellant-Cross-Appellee v. Commissioner ... , 862 F.2d 400 ( 1988 )
raymond-killingsworth-and-patsy-killingsworth-v-commissioner-of-internal , 864 F.2d 1214 ( 1989 )
Resser v. Commissioner , 74 T.C.M. 598 ( 1997 )
gilbert-r-miller-and-rita-miller-v-commissioner-of-internal-revenue , 836 F.2d 1274 ( 1988 )