Court Opinion

ID: 4486125
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:12.441746+00
Date Added: 2024-06-11T15:02:45.748223
License: Public Domain

WELLS, J., concurring: I agree with the majority opinion, but Judge Whitaker raises an additional ground with which I also agree. Judge Whitaker concludes that because the transactions on the London Metals Exchange would have been in violation of the rules of domestic exchanges in the United States, the presumption of section 108 does not apply to shield petitioner’s trades. As an alternative ground for a holding for respondent in the instant case, I agree with Judge Whitaker’s conclusion. I also would like to address other comments made by Judge Whitaker with which I disagree. Judge Whitaker states that the “majority opinion simply writes section 108 off the books.” With that I do not agree. The majority opinion interprets Congress’ intent to be that section 1081 does not serve to shelter from scrutiny transactions which were fictitious, prearranged, or otherwise in violation of the rules of the exchange. Dealers’ transactions which are not fictitious, are not prearranged, and are in accordance with the rules of the exchange still are fully protected by section 108, i.e., such transactions per se are deemed to be entered into in the course of a trade or business and losses thereon are allowed. See H. Rept. 99-426 (Conf.), at 911 (1985), 1986-3 C.B. (Vol. 2) 911. Judge Whitaker seems to suggest that transactions by dealers which are devoid of economic substance are to be protected from disallowance by section 108. Congress surely did not intend such a result. The House report’s reference to fictitious and prearranged transactions bears out such a conclusion. Congress may not have used the buzz words “economic substance,” but what are transactions which are either prearranged or fictitious other than transactions devoid of economic substance? Judge Whitaker’s interpretation of the word “prearranged” is too narrow. He would limit its use to the description of a transaction that is illusory because it is fictitious, i.e., did not take place or only took place in the papers drawn up to take advantage of the tax benefits. He apparently would not use the word “prearranged” to describe a transaction which may have actually taken place in the marketplace, but which was entered into from the outset in such a way as to be designed to lack any real economic significance. I would subscribe to the broader view of the interpretation of the word “prearranged.”2 Transactions that are fictitious and transactions that are prearranged are both illusory transactions. By using the word “prearranged” in the House report, I believe Congress intended that we should scrutinize illusory transactions of both types. The purpose of section 108 is to eliminate the requirement that commodities dealers prove a subjective profit motive, as might otherwise be required by section 165(c) of the Internal Revenue Code. Section 108 is not a carte blanche grant to commodities dealers of tax benefits for illusory transactions.3 It is clear that Congress did not intend to single out commodities dealers for special treatment for transactions which lack economic substance. The economic substance test was in existence prior to the enactment of section 108,4 and Congress easily could have provided that transactions of commodities dealers need not have economic substance if Congress had so intended. Sterrett, Chabot, Parker, Hamblen, Cohen, Jacobs, Wright, and Parr, JJ., agree with this concurring opinion.   All references to “section 108” are to sec. 108 of the Deficit Reduction Act of 1984 as amended by the Tax Reform Act of 1986.    Any other interpretation would render superfluous the language in the House report, “fictitious, prearranged.”    As we noted in Cherin v. Commissioner; 89 T.C. 986, 992 (1987) (Court-reviewed), the existence of a profit motive simply does not preclude a finding that a transaction lacks economic substance. Certainly, the fact that a taxpayer is in a trade or business (as sec. 108 deems commodity dealers to be) does not preclude the taxpayer’s transactions from being subject to a test for economic substance.    See, e.g., Frank Lyon Co. v. Commissioner, 435 U.S. 561, 583-584 (1978).