691 F.3d 1315
11th Cir.2012Background
- Calloways entered a three-year, nonrecourse loan arrangement with Derivium using 990 IBM shares as collateral; Derivium immediately sold the stock and paid Calloway 90% of its value, with Calloway retaining an option to reacquire later.
- The Master Agreement authorized Derivium to pledge, sell, and use the stock during the loan term; it also allowed termination only before funding of the loan and prohibited prepayment during the term.
- Tax reporting: Calloways did not report dividend income or the 2001 stock disposition on their 2001 or 2004 returns, and they filed their return late in 2004.
- IRS issued a deficiency notice and penalties for failure to timely file and for substantial underreporting of income; Tax Court ruled in IRS’s favor, holding the transaction was a sale for tax purposes and sustaining penalties.
- Majority Tax Court opinion held the 2001 transaction transferred the benefits and burdens of stock ownership to Derivium under Grodt & McKay Realty factors applied with Dunne refinement; concurrences disagreed on analytical approach but affirmed result.
- Court affirmed penalties after finding no reasonable cause or good faith for underpayment or late filing, and rejected the Calloways’ reliance on Nagy memo and Derivium statements.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Was Calloway’s Derivium transaction a sale or a loan? | Calloways: it was a bona fide loan, not a sale. | IRS: the transaction conveyed ownership and profits to Derivium; a sale. | Sale for tax purposes. |
| If sale, what governs the tax consequences (gain realization, etc.)? | Nagy memo and loan characterization should guide. | Economic substance shows sale; gains recognized in 2001. | Gain recognized as sale; 2001 income includable. |
| Whether the penalties for underpayment and late filing were proper. | Possible reasonable cause and good faith due to Derivium statements. | No reasonable cause or good faith; penalties warranted. | Penalties sustained; reasonable cause not shown. |
| Whether Calloways’ late filing penalty lacks reasonable cause given Derivium’s ownership statements. | Derivium’s possession reports suggested non-reportability. | Statements did not excuse failure to file; filing requirement stands. | Late-filing penalty affirmed. |
Key Cases Cited
- Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221 (1981) (multifactor test for determining sale vs. other dispositions; ownership rights)
- Anschutz Co. v. Commissioner, 664 F.3d 313 (10th Cir. 2011) (factors tailored to stock ownership; ownership burden/benefits)
- Commissioner v. Tufts, 461 U.S. 300 (1983) (nonrecourse liability and sale proceeds treatment under tax code)