Opinion ID: 613690
Heading Depth: 3
Heading Rank: 3

Heading: Dispute over Tax Characterization; Procedural.Background

Text: On their tax returns for 2001 and 2003, Taxpayers treated the transaction as a securities loan under § 1058. Accordingly, they assumed that their transfer of the Securities to Refco pursuant to the Loan Agreement, and Refco's return of the Securities when the Loan Agreement expired, were not taxable events. Instead, they: (1) treated the Securities as an asset that they acquired in October 2001 for the purchase price and disposed of in January 2003 for the then-market value; and (2) treated the Cash Collateral Fee as interest paid by them to Refco. [7] Accordingly, on their 2001 returns, Taxpayers claimed an interest deduction for the 2001 Fee Payment in the amount of $7.8 million. (The Samuelis claimed $7,796,903, or 99.8 percent of the total, while the Rickses claimed the remaining 0.2 percent, or $15,667.) On their 2003 return, the Samuelis reported $50,661,926 in long-term capital gain from the sale of the Securities to Refco. This amount represented the proceeds of the sale ($1.697 billion) less the purchase price of the Securities ($1.643 billion), and less transaction costs of $3.56 million, further adjusted to deduct the Rickses' ownership interest in the Securities. The Samuelis also claimed an interest deduction for $32,792,720, which was the amount of Cash Collateral Fee that had accrued on the termination date and was paid to Refco along with the original amount of the Cash Collateral (the 2003 Fee Payment). (The Rickses did not claim any interest deduction in connection with the termination of the transaction.) The Commissioner of Internal Revenue (the Commissioner) rejected this characterization of the transaction. The Commissioner determined that the transaction did not in fact qualify as a securities lending arrangement under § 1058 and instead adopted his own interpretation of the transaction, as follows: In October 2001, Taxpayers purchased the Securities from Refco for the purchase price ($1.643 billion) and immediately sold them back to Refco for the amount of the cash collateral (also $1.643 billion). Then, in January 2003, Taxpayers purchased the Securities from Refco a second time pursuant to a forward contract. The price for this second purchase was the amount of the cash collateral plus accrued Cash Collateral Fee ($1.684 billion). Immediately after this second purchase of the Securities, Taxpayers again sold them back to Refco, this time for their then market value ($1.698 billion). Accordingly, the Commissioner determined that Taxpayers: (1) had no capital gain or loss in 2001 (because they sold the Securities for the same price at which they had purchased them); (2) had $13.54 million in short-term capital gain in 2003; [8] and (3) could not deduct the Cash Collateral Fee payments as interest expense in either year, because no indebtedness ever existed. Accordingly, in April 2006, the Commissioner issued a Notice of Deficiency for tax years 2001 (in the amount of $2,177,532) and 2003 (in the amount of $171,026) to the Samuelis, and a Notice of Deficiency for tax year 2001 (in the amount of $6,126) to the Rickses. Both the Samuelis and the Rickses filed petitions with the Tax Court seeking redetermination of the deficiencies. [9] Each of Taxpayers and the Commissioner moved for summary judgment; the Tax Court granted the Commissioner's motion. See Samueli v. Comm'r, 132 T.C. 37 (2009). Taxpayers timely appealed.