Court Opinion

ID: 4482659
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:37.110575+00
Date Added: 2024-06-11T14:19:45.531629
License: Public Domain

TaNNENwald, /., concurring: I agree ivith the result reached by the majority, but on a different basis, namely, that petitioner realized a short-term capital gain. In so concluding, I eschew issues relating to the reaches of the “integral part of the business” doctrine upon which Corn Products Co. v. Commissioner, 350 U.S. 46 (1955), is founded and to the applicability of section 1233, either directly or by analogy, to transactions of the type involved herein.1 Bather, I rest my conclusion upon the factual basis that Amsterdam was in reality acting on behalf of petitioner in contracting to purchase pounds from the First National City Bank, that, in effect, such contract to purchase was used to close IFF’s short position with First National City Bank on December 20,1967, with the result that IFF became absolutely entitled to payment of the amount of the difference between $2.7691 and $2.4080 per pound, and that such amount represented short-term capital gain to IFF, the assignment of which to Amsterdam did not divest IFF of liability for tax on such gain. My conclusion is founded upon a careful analysis of the facts revealed — or, to put it more correctly, not revealed — by the record herein, in light of the well-established principle that the taxpayer has the burden of proof. Welch v. Helvering, 290 U.S. 111 (1933); Albino v. Commissioner, 273 F. 2d 450 (C.A. 2, 1960), affirming per curiam T.C. Memo. 1959-1; Rule 142, Tax Court Rules of Practice and Procedure. The contract to purchase pounds between Amsterdam and First National City Bank, the notifications by IFF and Amsterdam to First National City Bank of Amsterdam’s “purchase” of the 1966 contract between IFF and First National City Bank, and the acknowledgement of First National City Bank to Amsterdam are all dated the same day, namely, December 20, 1967. The acknowledgement by First National City Bank to Amsterdam is very revealing. I quote it in full: In reply to your letter of December 20, 1967, this is to confirm that we have agreed to your purchase from International Flavors and Fragrances Inc. their contract with us wherein they have sold to us on December 29, 1966 Pounds Sterling 1,100,000-0-0 for delivery on January 3, 1968 at the rate of $2.7691 per Pound. We also wish to confirm that we shall credit your Dollar Account with us on January 3, 1968 the dollar difference between our original purchase price of $2.7691 per Pound and the rate of exchange applied to your purchase from us of Pounds Sterling 1,100,000-0-0 to close this contract out. We have also received a letter from International Flavors and Fragrances Inc. confirming their sale of this contract to you. Awaiting your further instructions in connection with closing out this contract. A longhand notation to this letter reads as follows: “bt. Lsl,100,000 forward 1/3/68 at 2.4080 12/20/67 4:30 p.m.” The only evidence as to the foregoing documents relates to the source of the three documents which set forth the arrangements between First National City Bank and Amsterdam, namely, that they came from the files of the bank. The record is totally silent as to the extent of IFF’s knowledge, if any, of the arrangements. The only witness was IFF’s comptroller, who was not employed by IFF until 1970 (long after the transactions involved herein occurred) and therefore was not competent to testify as to such knowledge. Under these circumstances, I cannot conclude, as petitioner, who has the burden of proof, would have us do, that “No arrangement was made between IFF and Amsterdam to purchase pounds to close the short sale.” Indeed, given the clear confirmation in the letter from First National City Bank to Amsterdam with respect to the crediting of the latter’s purchase obligation, I think it reasonable to infer that the existence of Amsterdam’s contract to purchase pounds was a precondition of the purported acquisition of the short sale contract from IFF and that an immediate offset of the two obligations was intended with the crediting of the differential in price on January 3, 1968, the only act remaining to be performed.2  The cases relied upon by petitioner, dealing with the assignment of anticipated profit from the transfer of preferred stock, bonds, or notes to the issuing corporation, are distinguishable. In those cases, the right to receive the profit was close — indeed, very close — to fruition, but had not yet become a fixed legal right to receive payment. Stanley D. Beard, 4 T.C. 756 (1945); W. P. Hobby, 2 T.C. 980 (1943); Clara M. Tully Trust, 1 T.C. 611 (1943); John D. McKee, Et Al., Trustees, 35 B.T.A. 239 (1937). See also Conrad N. Hilton, 13 T.C. 623 (1949). The “near but yet so far” distinction upon which such decisions are posited stands sharply revealed when considered in light of the authorities which hold that a taxpayer cannot divest himself of capital gain to which he has become entitled as a result of an irreversible corporate liquidation or sale of stock. Kinsey v. Commissioner, 477 F. 2d 1058 (C.A. 2, 1973), affirming 58 T.C. 259 (1972); Hudspeth v. United States, 471 F. 2d 275 (C.A. 8, 1972); Rollins v. United States, 302 F. Supp. 812 (W.D. Tex. 1969); Stephen S. Townsend, 37 T.C. 830 (1962). Compare Simmons v. United States, 341 F. Supp. 947 (M.D. Ga. 1972): W. B. Rushing, 52 T.C. 888, 896-898 (1969), affd. 441 F. 2d 593 (C.A. 5, 1971). Nor is petitioner helped by such cases as Joseph Maloney, 25 T.C. 1219 (1956), Morris Shanis, 19 T.C. 641 (1953), affirmed per curiam 213 F. 2d 151 (C.A. 3, 1954), and Pacific Affiliate, Inc., 18 T.C. 1175, 1221 (1952), affirmed per curiam 224 F. 2d 578 (C.A. 9, 1955). In those cases, the subject matter was of a nonmonetary character, and the purchase and sale transactions were treated separately by the parties and were consummated through public stock or commodity exchanges. Additionally, with the possible exception of Shanis, the purchase and sale arrangements were between the taxpayer and different parties. Lack of identity of parties also existed in Frank C. LaGrange, 26 T.C. 191 (1956). Given the foregoing complicating elements, offsetting was either impossible or considered inappropriate.3 No such obstacles to immediate offsetting exist herein. In this case, the transactions were privately arranged and consummated, and the First National City Bank was a party to both the sale contract and the purchase contract (acquired at the same time as the transaction between IFF and Amsterdam occurred) and treated the two contracts as offsetting items with, for aught that appears in the record herein, IFF’s knowledge and participation.4 These critical facts distinguish the instant situation from that which might have obtained if the record had revealed that IFF simply sold its short sale contract, leaving it to the subsequent exercise by Amsterdam of its discretion whether to resell it, buy pounds in anticipation of closing it, or do neither in the hope that a change in the exchange rate would increase its profits.5 In this connection, I am constrained to note that the opportunity for offsetting, which I consider to have existed in the instant case, would not necessarily have been avoided if Amsterdam had contracted to purchase the pounds from a source other than First National City Bank; in such a situation, it would still be pertinent to inquire as to the involvement of First National City Bank in order to determine whether a circuitous form of transaction was utilized to camouflage the application of the offset rationale. Finally, I consider inapposite Stavisky v. Commissioner, 291 F. 2d 48 (C.A. 2, 1961), affirming 34 T.C. 140 (1960), also cited by petitioner to support its position. There, to be sure, there were two “when, as, and if issued” transactions — one a sale and the other a purchase— between the taxpayer and the same person. But these two transactions occurred practically simultaneously at the very outset6 and they were treated separately by the parties involved, including disposition in two different taxable years. More importantly, the issue in that case was framed in terms of whether a payment by the taxpayer upon the transfer of the contract of sale was an ordinary loss or a capital loss— an issue which turned upon whether the taxpayer had made a sale or a payment in exchange for a cancellation of a liability. After finding that section 117 (1) of the Internal Revenue Code of 1939 (the predecessor of section 1233) was inapplicable because the transactions occurred prior to its enactment, this Court held that all that had been sold was the “when, as, and if issued” sale contract which had been held for more than 6 months. Indeed, the rejection of the taxpayer’s claim for an ordinary loss, based upon its release from liability by the other party to that contract, coupled with the fact that the taxpayer did not, at that time, transfer the “when, as, and if issued” purchase contract, lends support to treatment of the facts in this case as a transfer of a capital asset by IFF, namely, the offsetting contract to purchase pounds — an asset which had clearly been held only momentarily. See fn. 2 supra; Raymond B. Haynes, 17 T.C. 772, 777 fn. 2 (1951). Compare KVP Sutherland Paper Co. v. United States, 344 F. 2d 377, 383 (Ct. Cl. 1965); Loewi & Co., 23 T.C. 486, 489-490 (1954), affirmed on other grounds 232 F. 2d 621 (C.A. 7, 1956). See also Skelton, J., concurring in Gillin v. United States, 423 F. 2d 309, 314-316 (Ct. Cl. 1970). Goffe and Wiles, JJ., agree with this concurring opinion.   See also Duncan, “Lowering the Value of the Dollar Raises Certain Tax Problems ” 37 J. Taxation 115 (1972). ’    It makes no difference, for tlie purpose of tills case, whether we view the transaction as an accrual in 1967 in favor of IFF (an accrual-basis taxpayer) of a short-term capital gain deriving from the right to receive $897,000 as a result of the transfer of the contract to purchase pounds to the First National City Bank in exchange for the termination of the short sale obligation plus the right to receive cash followed by the immediate sale of that right for $387,000, giving rise to a short-term capital loss of $10,000, or the anticipatory assignment by IFF of a fixed, although not technically “accrued,” right to receive the profit from the closing of the short sale for $387,000.    Lack of Identity of parties made it necessary for this Court, in LaGtrcmge, to articulate its decision in terms of the continued liability of the taxpayer in order to find the necessary agency relationship, a distinguishing factor upon which petitioner heavily relies.    As a consequence, the absence of continued liability by IFF becomes totally irrelevant. See fn. 3 supra.    By virtue of‘the purchase of the same amount of pounds at $2.4080 per pound, any subsequent fluctuation in the value of the pound was totally without effect upon the amounts to be received or paid by IFF, Amsterdam, or First National City Bank.    Under such circumstances, they were akin to “arbitrage.” Cf. sec. 1233(f).