Michael Tseytin v. Commissioner of Internal Reven
698 F. App'x 720
| 3rd Cir. | 2017Background
- Michael Tseytin owned 75% of US Strategies, Inc. (USSI); Archer Consulting owned 25%.
- Tseytin agreed to buy Archer’s 25% for $14 million (contract stated purchase for his "own account") and, shortly thereafter, USSI was sold to AmRest for cash and stock (~$54M total).
- Timeline: Archer transferred shares to Tseytin on June 14; USSI-AmRest merger closed July 2; AmRest paid Tseytin July 3; Tseytin paid Archer July 5.
- Tseytin reported taxes on the transaction, then amended his return seeking a refund; IRS audited, denied refund, and Tax Court upheld IRS assessment.
- Core factual distinctions: two separate written agreements (Archer–Tseytin purchase and USSI–AmRest merger), different acquisition dates and different tax bases for the two blocks of stock.
Issues
| Issue | Plaintiff's Argument (Tseytin) | Defendant's Argument (Commissioner) | Held |
|---|---|---|---|
| Whether Tseytin should be taxed on the portion of sale proceeds attributable to Archer's shares | Tseytin contends he never substantively owned Archer's shares but acted as Archer's agent; thus he should not recognize gain on the $14M portion he passed to Archer | The written agreements show Tseytin purchased Archer's shares for his own account and was record owner free of restrictions; Danielson rule requires honoring form absent exceptions | Court held Tseytin owned the Archer block and must be taxed on the full proceeds (Danielson applies; no applicable exception) |
| Whether Tseytin may net a loss on the Archer block against gain on his own block (i.e., treat both blocks as one unit under IRC §§354/356) | Tseytin argues the two blocks should be treated as a single transaction so his small loss on Archer’s shares offsets larger gain on his block | Commissioner: separate units must be analyzed to prevent §356 exception from swallowing §354; the blocks were acquired at different times with different bases | Court held the blocks are separate units; losses on the Archer block are not recognized under §356; no netting allowed |
| Relief for co-appellant Ella Tseytin | Ella contends she was erroneously held liable for Michael’s tax deficiency | Commissioner agrees liability as to Ella was erroneous | Court remanded limited issue to Tax Court to correct erroneous liability as to Ella |
Key Cases Cited
- Comm’r v. Danielson, 378 F.2d 771 (3d Cir. 1967) (establishes bright-line rule that form of transaction controls unless narrow exceptions apply)
- Comm’r v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134 (1974) (taxpayer must accept tax consequences of chosen form)
- Amerada Hess Corp. v. Comm’r, 517 F.2d 75 (3d Cir. 1975) (Danielson does not bar contract-interpretation challenges to tax consequences)
- Comm’r v. Bollinger, 485 U.S. 340 (1988) (agency principles considered in tax context)
- Lakeside Irrigation Co. v. Commissioner, 128 F.2d 418 (5th Cir. 1942) (separate units in multi-block stock transfers must be analyzed separately)
- Comm’r v. Clark, 489 U.S. 726 (1989) (description of nonrecognition rules for stock-for-stock exchanges)