Opinion ID: 206582
Heading Depth: 2
Heading Rank: 1

Heading: Grapevine and the Tigues

Text: This is a tax case. The story, for our purposes, begins in late 1999. Plaintiff Grapevine Imports, Ltd. (Grapevine) was a limited liability partnership with three partners. Taxpayers Joseph J. Tigue and Virginia B. Tigue, limited partners, each owned 49.5% partnership shares. Plaintiff T-Tech, Inc. (T-Tech) owned the remaining 1% as a general partner, and was also the partnership's tax matters partner. T-Tech, in turn, was wholly owned by Mr. Tigue. The Tigues purportedly arranged to sell Grapevine (which owned an auto dealership) for upwards of $10 million. The government contends that the Tigues' collective tax basis in Grapevine at that time was about $1 million, so the sale would have resulted in significant taxable capital gains for the Tigues. From that starting point, a series of transactions took place that changed the tax picture significantly. On December 9, 1999, the Tigues each sold short $5 million in U.S. Treasury Notes. [1] In a short sale, the seller sells some security that he does not actually own, normally by working with a lender to borrow securities at a set fee or rate for some period of time. The seller sells the borrowed securities; time passes. Then, just before he is due to return the securities to the lender, the seller buys equivalent securities using funds received from the earlier sale. He gives the equivalent securities to the lender, and the transaction is closed. See Zlotnick v. TIE Commc'ns, 836 F.2d 818, 820 (3rd Cir. 1988) (describing short sales). In this case, the initial phase of the Tigues' short sales brought in $9,978,119. Before the sales were closed, the Tigues conveyed these proceeds and the obligation to close the short sales to Grapevine. In order to close the sales, Grapevine purchased Treasury Notes on the open market having face value of $10,000,003. Grapevine then conveyed the notes to the lender, closing the short sale. Because Grapevine paid more for the Treasury Notes than it received from the Tigues, Grapevine recorded a $21,884 loss on the transaction. Shortly thereafter, on December 31, 1999, the Tigues sold Grapevine for $11,017,146, and the proceeds were delivered to the Tigues and T-Tech according to their partnership interests. Grapevine filed its 1999 partnership tax return on April 19, 2000, showing a net short-term loss of $21,884 (attributable to the short sale). On or about April 17, 2000, the Tigues filed a joint federal income tax return in which they reported a long term capital loss of $45,077 from their sale of Grapevine. The Tigues' return claimed a basis in Grapevine of $10,961,317. The government contends that Grapevine and the Tigues' returns were improper. It contends that the Tigues' reported capital loss stemmed from an unlawful overstatement of the Tigues' basis in Grapevine. By treating the conveyance of the short sale proceeds (the $9,978,119) as increasing basis, but failing to apply a corresponding basis reduction to account for Grapevine's new obligation to close the short sales, the Tigues managed to dramatically increase their basis in the partnershipand so reduce their capital gainsvia economically meaningless transactions. In other words, the government accuses the Tigues, through Grapevine, of using a Son of BOSS [`Basis and Options Sales Strategy'] tax shelter. See Kornman & Assocs. v. United States, 527 F.3d 443, 446 n. 2 (5th Cir.2008) (describing Son of BOSS tax shelters); I.R.S. Not. 2000-44, 2000-2 C.B. 255 (further describing such shelters, and identifying them as improper listed transactions). On December 17, 2004, the IRS issued a Final Partnership Administrative Adjustment (FPAA) to T-Tech that administratively reduced the Tigues' basis in Grapevine by $10 million for 1999, thus requiring recomputation of the partners' tax liability.