Court Opinion

ID: 4486124
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:12.436105+00
Date Added: 2024-06-11T15:02:45.744964
License: Public Domain

WHITAKER, J., concurring: I find the majority’s reasoning in this case to be faulty and the interpretation of section 108(b) of the Tax Reform Act of 1984, as amended by the Tax Reform Act of 1986, to be erroneous.1 However, respondent in this case makes the alternative argument that section 108(b) and (f) was not intended to apply to transactions executed on a foreign exchange. I find this argument to be dispositive of the case and conclude, therefore, that the majority has reached the right result but for the wrong reasons. Therefore, I concur in the result only. Section 108(b) provides— For purposes of subsection (a), any loss incurred by commodities dealer in the trading of commodities shall be treated as a loss incurred in a trade or business. However, this unambiguous language is qualified in the report of the House Ways and Means Committee2 which states in part that: Further, the presumption would not be available in any cases where the trades were fictitious, pre-arranged, or otherwise in violation of the rules of the exchange in which the dealer was a member. * * * [H. Rept. 99-426, at 911 (1985), 1986-3 C.B. (Vol. 2) 911.] The hub of the majority opinion seems to be the conclusion that petitioner incurred no loss since the transactions lacked economic substance and that therefore we need never reach section 108.3 With this reasoning I disagree. Losses actually incurred are disallowed for tax purposes where the transaction lacks economic substance. Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978); Knetsch v. United States, 364 U.S. 361, 366 (1960). Unless losses are incurred, the issue does not arise. We found in Glass that losses were incurred. See Glass v. Commissioner, 87 T.C. 1087, 1105-1106, 1114 (1986). The losses are described in the opinion as “putatively incurred” but, in context, that language must refer to the tax consequences of the actual losses. The majority also attempts to find support for the conclusion that section 108 does not apply in the legislative history by relying on the word “prearranged.” Again I disagree with the majority’s analysis. I am constrained to conclude that the Ways and Means Committee used the word “prearranged” as equivalent to “fictitious” and as a way of describing that species of transactions which we treat as factual shams as in Brown v. Commissioner, 85 T.C. 968 (1985), affd. sub nom. Sochin v. Commissioner, 843 F.2d 351 (9th Cir. 1988), and Julien v. Commissioner, 82 T.C. 492 (1984). In my judgment, there is no basis for expanding the exclusion from the scope of section 108 beyond that specified in the House Ways and Means Committee report, which should constitute the maximum reach of our legislative interpretation. This and the Glass opinion Eire the first occasions in which this Court has used “prearranged” to mean other than “false” or “fictitious.”4 In Glass, we seem to have used the word “prearranged” in a pejorative way to refer to transactions designed to achieve a desired result, i.e., losses. Although we described the transactions in Glass as preEir-ranged, our actual holding was that the transactions lacked economic substance and were therefore shams. Here, the opinion refers to the transactions as prearranged apparently to enhance the opinion’s effort to come within the exclusion from the benefit of section 108(b) set forth in the committee report. However, the majority makes no effort to determine what Congress intended by its use of the word “prearranged,” and, furthermore, the majority’s holding is not based on whether the transactions were prearranged, but is based on the conclusion that no losses were incurred.5  The 1986 committee report explains the necessity for the inclusion of section 108(b) in the 1984 Act by stating that a profit-motive presumption was provided for commodities dealers “because of the inherent difficulty in distinguishing tax-motivated straddle transactions from profit-motivated straddle transactions when the taxpayer was in the trade or business of trading in commodities.” H. Rept. 99-426, at 910-911 (1985), 1986-1 C.B. (Vol. 2) 910-911. Although transactions without economic substance but motivated by tax considerations are normally not recognized for tax purposes (Frank Lyon Co. v. United States, supra), Congress, by enacting section 108, intended to allow straddle trading losses of commodities dealers. Those transactions are not to be tested for economic substance, at least, as I conclude, where effected in the domestic market. Thus, petitioner would fit within section 108(b) unless Congress intended to protect dealers only when trading in U.S. markets. The majority opinion simply writes section 108 off the books, without recognizing that more than 80 years ago the Supreme Court held that there is a presumption against interpreting a statute in a way that renders it ineffective or futile. Bird v. United States, 187 U.S. 118, 124 (1902). This rule of statutory construction is particularly apt where, as here, Congress restated retroactively with some modification in the 1986 Act the provision first enacted in the 1984 Act. I believe the majority should instead focus on the scope of the section. Section 108(f) of the act defines a commodities dealer as a taxpayer who is an individual described in section 1402(i)(2)(B). Section 1402(i)(2)(B) defines a commodities dealer as “a person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade which is designated as a contract member by the commodities futures trading commission.” The parties here agree that petitioner is such a commodities dealer. Majority opinion at pages 976-977. But that does not answer the inquiry. To determine the scope of section 108, I look again to the committee report. That report provides in part: If a person qualifies as a commodity dealer, the subsection (b) treatment applies with respect to any position disposed of by such person. It would, for example, apply without regard to whether the position was in a commodity regularly traded by the person, whether it was traded on an exchange on which the dealer was a member, or whether an identical position was reestablished on the same trading day or subsequently. In the cases of trade on a domestic exchange described in Code section 1402(i)(2)(B), the identification of positions disposed of shall be as provided in exchange procedures and records of the exchange or clearing house shall be controlling in the absence of proof that the rules were violated. * * * Further, the presumption would not be available in any cases where the trades were fictitious, prearranged or otherwise in violation^ of the rules of the exchange in which the dealer is a member. [H. Rept. 99-426, at 911 (1985), 1986-3 C.B. (Vol. 2) 911; emphasis supplied.] The committee obviously was concerned with the normal trading pattern of commodities dealers it was intending to benefit. It was only the losses incurred in that normal trading pattern which would present the problem of classification between business and tax motivation. Trading on the London metals exchange does not comport with the rules of trading in the United States on any of the several domestic commodities futures exchanges. The London options transactions would have been in violation of the rules of the commodities exchanges in this country. The presumption of section 108(b) would, therefore, not apply to trades by petitioner on the London Metal Exchange. Moreover, the definition of the term “commodity dealers” as set forth in section 1402(i) refers to a person who is engaged in trading section 1256 contracts. Section 1256(b) defines a section 1256 contract to mean— (1) any regulated futures contract, (2) any foreign currency contract, (3) any nonequity option, and (4) any dealer equity option. This provision was added to the Code by Economic Recovery Tax Act of 1981, Pub. L. 97-34, sec. 503(a), 95 Stat. 327. The definitions of these terms set out in section 1256(b) as amplified by the applicable committee reports 6 demonstrate that section 1256 contracts refer to financial transactions which take place on domestic exchanges or in the interbank market in the United States. The concern which Congress sought to avoid by enacting section 108 was to preclude the Internal Revenue Service from attacking straddle transactions of a taxpayer trading for his own account through the domestic investment banking or securities dealer facilities used for customers. There is no difficulty distinguishing transactions such as those here involved where the commodities dealer taxpayer uses trading facilities and dealers doing business in a foreign country. In my opinion, a commodities dealer during this period of time who chose for his own account to trade in a foreign market simply placed those transactions outside the scope of section 108. It is on this basis that I would hold for respondent in this case. WILLIAMS, J., agrees with this concurring opinion.   All references to sec. 108 are intended to refer to that provision as amended by the Tax Reform Act of 1986.    The conference follows the House bill in this respect. H. Rept. 99-841 (Conf.), at 11-845 (1986), 1986 C.B. (Vol. 4) 845.    See majority opinion at page 986 where the majority concludes that “Since the straddle transactions in Glass were prearranged, causing the transactions to lack economic substance, petitioner incurred no losses to which the per se rule can be applied.”    So far as I have been able to determine this Court has consistently used “prearranged” to mean “rigged,” “fixed,” “artificial,” i.e., a “factual sham.” The “manipulation” that occurred in DeMartino v. Commissioner, T.C. Memo. 1986-263, was price manipulation in trades that violated the rules of the exchange. Unless this Court is prepared to disregard all transactions on the London Metal Exchange, the kind of factual findings made in DeMartino are required here. All the other cases cited by my colleagues likewise presented false or fictitious transactions — so-called factual shams — found by this Court to be shams only after the Court had found the necessary facts to support the conclusion that the transactions were not bona fide. Forseth v. Commissioner, 85 T.C. 127, 149 (1985), affd. 813 F.2d 293 (9th Cir. 1987). We stated this principle in a recent Court-reviewed opinion, Perlin v. Commissioner, 86 T.C. 388, 415 (1986) as follows: “Alleged transactions involving commodity futures contracts which are in fact prearranged or fictitious will not be recognized for Federal tax purposes. See Brown v. Commissioner, 85 T.C. 968 (1985); Forseth v. Commissioner, 85 T.C. 127 (1985); Miller v. Commissioner, 84 T.C. 827 (1985), on appeal (10th Cir., Nov. 20, 1985); Julien v. Commissioner, 82 T.C. 492 (1984). * * * ” In Glass v. Commissioner, 87 T.C. 1087, 1172 (1986), we made no finding that the transactions were factual shams. In contrast, we expressly hypothesized that the transactions were real: “For purposes of the discussion which follows we assume, without deciding, that the commodity options and futures contracts which petitioners entered into were actual contracts. In thus postulating this assumption, we necessarily focus our attention not on whether petitioners have sufficiently authenticated their transactions (i.e., proved that there were actual transactions), but rather whether such transactions, even if actually proven, are nevertheless sufficient to accomplish the tax results which petitioners contemplated. ”    In my opinion, in order for the majority to rely on the word “prearranged” (assuming, as I conclude, that Congress used that word as synonymous with “fictitious”) the majority could not rely on Glass, but would have to make express findings that the transactions were fictitious.    S. Rept. 97-144, at 158 (1981), 1981-2 C.B. 475; H. Rept. 97-215 (Conf.), at 258 (1981), 1981-2 C.B. 512.