Kornman & Associates, Inc. v. United States

merely infor Act. Fried received or depend cannot Claims by the relator known that had been program United mation about a public disclosures.” rely on Em hotly v. FPC-Boron Findley rel. disclosed debated. publicly ex States (D.C.Cir. Club, F.Sd ployees’ argument allegations that his Fried’s 1997). they because relate to this school unique Fried fraud is also insufficient. district’s expe argues professional Fried his he the information argues without Security Administra with Social rience independent his investi through received after acquired he and the information tion day” in which the “last gation, manner independent investiga conducting his own implemented by exemption being was exemp day” the use of the “last tion into gone ISD would have undetected West “original him ISD make an by West Security Administration. the Social underlying his of the information source” Every contention. as record belies this fraud claim. day” exemption program “last pect matter, must initial record As an including its for potential well known— apply more than his that Fried did show The bur school districts. abuse Texas information: publicly-disclosed expertise infor was on to show that the den Fried may [not] infоrmation second-hand were he discovered allegations mation independent “direct into converted than information “qualitatively different knowledge” simply plaintiff because the not discovered” and already what had been investigation or ex- through discovered merely “product outgrowth” knew. public already what the perience Recovery information. Fed. publicly disclosed Instead, or investigation experience vs., Inc., Fried 72 F.3d at 452. Ser into must translate the relator either not met this burden. has fact, must compelling or additional some rela- a new and undisclosed demonstrate court cor- For these the district reasons facts, disclosed tionship between “original rectly held that Fried was not governmental agency “on puts Act. The under the False Claims source” fraud, might that fraud trail” of where AF- of the district court judgment go otherwise unnoticed. FIRMED. particu- at 179. Fried

Reagan, 384 F.3d ob- focuses us the information he

larly email through conversations and

tained man- ISD’s business

exchanges West retiring teach- posed He as either

ager. seeking employment. other

er someone or sleuthing, his Fried discovered

Through day” exemption under “last 6.5 hours and receive could work

teacher ASSOCIATES, INC., as KORNMAN & security coverage whereas someone social In- tax matters Valiant not program in the would participating 99-100, LP, a TEFRA Part- vestments security benefits to оbtain social be able Plaintiff-Appellant, nership, they 30 hours. These worked over unless allega- “independent” “direct” and are the he asserts. tions America, indepen- of direct UNITED STATES type

This is not the Defendant-Appellee. knowledge contemplated by the False dent Producer, Inc., Colm matters II,

partner LP, for GMK-GMK Partnership, Plaintiff-Appel-

TEFRA

lant, America,

United States of

Defendant-Appellee. Family I, 5-percent

Ettman Trust

group Valiant Investments

LP, Partnership, a TEFRA Plaintiff-

Appellant, America,

United States of

Defendant-Appellee. Family I,

Ettman Trust II, LP, a TEFRA

GMK-GMK Part-

nership, Plaintiff-Appellant, America,

United States of

Defendant-Appellee.

No. 06-11422. Appeals,

United States Court of

Fifth Circuit.

May KING,

Before DeMOSS and SOUTHWICK, Judges. Circuit DeMOSS, Judge: Circuit In these consolidated TEFRA partner- ship proceedings,1 argues the Government that the Appellants attempted to create enormous, artificial loss that devoid content by using economic sale variant of “Son of tax BOSS” Through shelter.2 a pre-arranged series of involving transactions short sale (T-Notes) Treasury subsequent Million, deposited which was mately $102.5 mary and dismissed the actions judgment brokerage in After the Trust’s account. 1, 2006. The prejudice on December sale, the completion short timely appeal. filed a notice of ap- account consisted of brokerage Trust’s obligation cash, we conclude Because in proximately Million com- $104.5 pur- close is a for to a short sale deposit the Million initial prised of $2 judg- § affirm the poses of I.R.C. proceeds, plus Million short sale $102.5 ment of district court. obligation replace an to the borrowed (ie. to return in-kind T-Notes DLJ). money brokerage in the ac- The

I Facts until the count could not be withdrawn Trust the borrowed T-Notes to Participants The returned A. DLJ. pre-ar- in participants All of the this day that it executed the con- On the same

ranged of transactions were series 27, 1999, sale, Kornman, the Trust attorney short December Gary to who nected brokerage account Val- transferred to wealthy marketed tax individu- shelters partner- limited iant in return for a 99.99% organized The was for the ben- als. Trust descendants, in ship By acquiring interest his Valiant. efit of Kornman and account, brokerage in Valiant assumed its trustee Kornman was sole K&A, T- obligation replace the borrowed general was Valiant’s 28, 1999, the Trust Korn- Notes. On December general partner was Colm. GMK’s in its interest Valiant GMK both K&A transferred man was the sole shareholder of limited Czerwinski, in return for 99.99% Brian who ulti- and Colm. in then owned in GMK. Trust

mately purchased interest Val- interest GMK’s in limited interest iant, Organiza- 99.99% Heritage worked for the GMK, limited tion, part- which owned a 99.99% of which Kornman (Heritage), L.L.C. Vаliant, in which owned Heritage nership interest shareholder. filed was sole consisting of brokerage account Chapter bankruptcy $104.5 in the United for obligation to re- Million in cash and Bankruptcy for the Northern States Court place the borrowed T-Notes. May Texas on District of 30, 1999, GMK replace On December sold based on the in Czerwinski shorted T-Notes. interest Valiant in the amount promissory note of $1.8 reported GMK’s loss $102.7 obli- Million. Czerwinski assumed the Trust, enabled the a 99.99% partner in gation price to close short sale. The GMK, to offset its future capital gains. On paid for Valiant that Czerwinski reflected Losses) (Capital Schedule D Gains and reality that most of the cash in ‍​‌‌​‌‌​‌​​‌‌​‌‌‌‌​‌‌​‌‌​​​​​​‌‌‌​‌‌​​​‌‌‌​​‌​​​‌‍the (Form 1041), its 1999 tax return the Trust brokerage would used account to close reported capital a short-term loss $102.6 day, sale. On that Decem- same pro Million as its rata share of GMK’s loss. 30, 1999, ber the short sale closed 1211(b) I.R.C. limited the deduction of acquisition of through the T-Notes capital $3,000 losses the lower of or separate three transactions at a total cost capital excess of gains. losses over capital Milliоn, of approximately including $102.7 Having capital gains the Trust accrued interest. These were transactions $3,000 deducted of its loss. It then carried reported brokerage the Trust’s account remaining over the loss to 2000. See According Government, statement. 1212(b). Czerwinski did not have authority over return, On its the Trust used account; always Kornman remained capital carryover $562,000 loss to offset the signatory. $123,000 capital short-term gains and

long-term capital gains. This offset re- C. The Tax Treatment the Transac- duced capital the Trust’s net loss

tions Million. capital The Trust then claimed $3,000 loss deduction of on its 2000 tax Although partnerships pay not do feder- return and carried remaining forward the tax, § al they income see I.R.C. return, loss to 2001. On its 2001 tax the required to file annual information returns carryover Trust used this capital loss to reporting partners’ the distributive share offset short-term capital gains of Mil- $1.1 income, of gain, deductions or credits. long-term lion and capital gains of Weiner United $585,000. (5th Cir.2004). The partners individual report then their distributive share on D. The Summary Cross-Motions for their federal tax Id.; income returns. Judgment § also I.R.C. In their motion summary judgment, for On its return for Appellants GMK the upon § relied I.R.C. 1233 in reported a capital short-term loss arguing of the obligation that $102.7 close short Million from the sale of its sale is a “contingent liability,” which does It computed interest Valiant. liability this not constitute a loss for purposes of by subtracting purported Second, § outside basis Appellants the ar pur- Valiant of Million from gued the that $104.5 the transaction was valid under ported of price sales Million. GMK the economic Third, $1.8 substance doctrine. did treat assumption not Czerwinski’s of the argued Treasury that Reg Valiant’s obligation to replace 2(b), § the bor- ulation upon which was relied 1.701 — part rowed T-Notes as of by the amount real- the IRS to recharacterize the transac interest, tion, the ized on sale of its was invalid and unconstitutional. Fourth, GMK’s outside basis in the partner- Appellants argued the that Trea ship adjusted interest not sury § was or reduced Regulation apply 1.752-6 does not occurred, with the understand- transaction case, it exceeded is invalid because properly, that “if structured there grant ing of Congressional of the scope tax out it.” significant be a benefit impermis- would is invalid bеcause authority, McBain, at- to James another retroactive, According and is unconstitutional sibly potential torney, key Fifth Clause of the element Due Process under the of Valiant Czer- tax losses was sale Amendment. winski, if Kornman had chosen have argued Government response, position out rather close GMK is a obligation to close a short sale Czerwinski, than transfer Valiant § of I.R.C. 752. Sec- would not have ex- loss Treasury ond, argued that Government isted. requires that the ob- Regulation 1.752-6 must be treat- DeRosa, close a short sale ligation to David one of the Government’s the Trust’s as that reduces ed short sale was experts, concluded Third, Gov- outside basis Valiant. flip more than a coin the short-term Regulation Treasury argued that Treasury ernment Market. behavior of U.S. 1.701-2, Partnership Anti-Abuse The risk was minimal and so was the Rule, the IRS to valid and allowed meaningful gains or losses. The chance a sale recast the transaction assignment brokerage ac- purported Trust, rather account brokerage count Valiant as December of its interest occurred, than GMK and such in all likelihood never Valiant, owned the bro- purportedly which industry transfer was consistent with kerage This recharacterization account. practice. non- in a disallowance

would result Fourth, Proceedings F. District Court portion of GMK’s loss. economic argued Appel- the Government plain “[a] court held that district judg- to summary not entitled lants were reading section 752 indicates GMK genuine of material ment because issues re have treated the should regarding applicability fact existed T-Notes as place the borrowed step-transac- and the economic substance Producer, Inc. under section 752.” COLM tion doctrines. 713, 715 F.Supp.2d v. United (N.D.Tex.2006). the district particular, In Testimony Deposition K assump concluded that Czerwinski’s court that he did not have Czerwinski testified this of GMK’s share of should re- any relationship contractual with DLJ an amount realized be treated as additional account, Korn- brokerage garding 752(d). at under section Id. on the sale signatory. Prior to de- man remained the conclusion, reaching dis In this 716. brokerage in the the Million positing $2 upon relied the definition trict court account, had asked Czerwinski Kornman “liability” in Black’s contained Law Dictio purchaser to be the ultimate Valiant. (1) upon at 715. It also relied Id. nary. that he wanted Kornman told Czerwinski (2) Ruling Salina the transaction to close 1999. Commissioner, 80 L.P. v. Partnership, (Nov. (CCH) 2000), Ahrens, attorney helped who T.C.M. Ed an that an both of which held on opinion letter which Kornman WL draft relied, close a short sale is obligation allegedly ground- testified that Producer, 460 and under section COLM for the was conceived work shelter court F.Supp.2d at 715-16. The district nearly year fully blueprinted before Commc’ns, (3d Cir.1988). contingent liability rejected Appellants’ at 716. argument. Id. Because held The Third Circuit described a short sale as obligation replace borrowed follows: liability, sale is a securities a short selling accomplished by Short selling is not address the district court did addition- stock which yet the investor does not by parties. al Id. at arguments -raised own; normally this is done borrowing- shares from a agreed upon broker an point fee rate of interest. At this Analysis II. buyer investor’s commitment to the the stock complete; buyer is has his A. Standard Review shares and purchase the short seller his The granted district cоurt sum price. obligated, seller mary judgment for the IRS. We review however, buy equivalent number of granting summary district court’s order shares order to return the borrowed novo, judgment applying de “the le same theory, shares. the short seller gal ap standards that the district court covering purchase makes this using the plied summary to determine whether funds he received from selling bor- judgment appropriate.” Harvill v. rowed stock. Herein lies the short sell- Commc’ns, L.L.C., Westward potential profit: price er’s if the (5th Cir.2005). Summary 433-34 sale, the stock declines after the short judgment should be rendered “if the he does not all need funds make discovery pleadings, and disclosure covering purchase; his the short seller file, any on materials affidavits show pockets then the difference. the oth- On genuine that there is no issue as to hand, er there is limit to the short material fact and that the movant is enti potential seller’s if price loss: judgment a matter tled to of law.” rises, stock so too does the short seller’s “[S]ummary Fed.R.Civ.P. judgment 56(c). loss, and cap since there is no to a is appropriate where the issue before price, stock’s thеre is no limitation on pure the court is a question of law.” She the short risk. seller’s There is no time line v. Corp., Dun & F.2d Bradstreet limit to cover.4 Cir.1991).

“Selling short,” therefore, actually in- B. Selling The Basics Short volves two separate transactions: short sale itself and the subsequent cov- A short sale securities that ering purchase. are not owned seller. Provost 443, 450-51, United Id.; Christian, 269 U.S. 46 see also W. James Robert 152, (1926). S.Ct. 70 L.Ed. Whalen, 352 “Where Shapiro, & John-Paul Naked the traditional profit by investor seeks to Selling: Exposed Short How are Inves trading tors?, a stock the value of which he ex- 1033, 43 Hous. L. Rev. 1041 — 42 pects rise, (2006) sale). the short seller seeks to (describing a traditional short profit by trading expects stocks which Although he the Third Circuit addressing was to decline in Zlotnick, value.” TIE Zlotnick v. the short sale of stocks seller, genuine 4. “A price securities short security.” who bor- nificant rise in the of the delivered, security may Friedman, rowed the she has Stalking Squeeze: Richard D. position long hold her as as she is able to Understanding Manipu- Commodities Market margin indefinitely, meet her if has she lation, 30, (1990). calls— 89 Mich. L.Rev. 45 n.36 sig- financial a wherewithal withstand

451 only if language of a statute equal- literal that it describes are principles basic lead to absurd re language would plain of T-Notes. to the short sale ly applicable sults, interpretation or if such an would case, of the Trust’s short sale In this Congress. the intent of Lamie v. defeat value) (face of T-Notes Million $100 Tr., 526, 534, 124 States 540 U.S. United 27, generated pro- 1999 December (2004); 1023, 157L.Ed.2d 1024 John S.Ct. covering Million. The ceeds of $102.5 (5th 1307, 1319 Sawyer, son 30, on December occurred transaction Cir.1997). “Only application of after 1999, execut- purportedly Czerwinski when construction, statutory of includ principles acquired covering transaction ed the construction, ing the canons of and after a Million, T-Notes for $102.7 borrowed ambiguous conclusion statute is capital of resulting in short-term loss legislative turn histo may court to the $200,000, cost i.e. the excess approximately Jobs.com, Inc., ry.” Carrieri v. replacement securities acquiring (5th 508, Cir.2004); also Exxon 518-19 from the sale of proceeds over the Inc., Servs., Corp. Allapattah Mobil However, the Trust securities. borrowed 2611, 568, 125 162 L.Ed.2d U.S. S.Ct. capital loss of reported a short-term (2005). on its tax return. argues that

The Government falls within obligation to close a short salе Statutory Interpretation C. plain meaning “liability” of the term statutory requires interpreta- This case who in a because “one borrows securities provisions taxation fixed, legal obligation sale has (the Code). of the Internal Code property.” the borrowed See return occurred, At the time that this transaction Dictionary ed.2004) (8th Black’s Law was statu- during December there (defining liability quality or state “[t]he “liability” tory definition of or being legally obligated accountable” formally IRS not and the had section pecuniary obligation; “[a] financial treasury in its definition promulgated debt”). sale, In a short the borrower has regulations.5 fixed, obligation to return in-kind legal broker, “A money. fundamental canon statuto See securities Zlotnick, ry According the ab construction instructs F.2d at 820. definition, Government, statutory give sence of the short seller’s obli ordinary meaning.” replace property their Wallace the borrowed gation terms (In borrowing, and “the Rogers), F.3d fixed at the time Rogers re Cir.2008) omitted). unconditional re marks borrower’s (quotation un- remains borrowed place authorized deviate from We are regu- рroposed regulations containing a similar def published proposed adopted § liability, included lations under inition which was however, liability; 1.752-1(a)(1)(ii), this definition definition Prop. Reg. Treas. excluded, explanation, without when re- 37,436 37,434, (Proposed June Fed.Reg. regulations were in 1991. vised finalized (Ef 1.752-1(a)(4)(i) 2003); Reg. Treas. Fed.Reg. Reg. 1.752-1T(g), 53 Prop. Treas. 26, 2005). May Under current Trea fective 53,150-51 30, 1988). 53,143, (Dec. Accord- 1(a)(4)(i), ap which sury Regulation 1.752 — IRS, ing change was the made "[t]his by or a plies to incurred assumed liabilities simplification purpose not to for of the 24, 2003, or June the on after regulation.” change of IRS the substance the obligation would consti to close a short sale Advisory, WL 1997 33313960 Field Service liability purposes 752. for of section tute 21, 2003, (Nov. 1997). published IRS In the 452 despite subsequent liability fluctuations short sale is a for

changed” purposes of underlying of the 752, the market value secu- section and the of value this is rity. equal proceeds to the initial of the short compelled sale. This conclusion is not focuses the the Government Whereas statute; plain language rather, the the obligation return in-kind idea that the by adopting we reach it the reasоning obligation was a fixed at the time T-Notes espoused by the IRS several revenue brokerage the that Trust contributed the rulings. Valiant, the Appellants account to focus on that obligation

the idea the value that is previously We have relied on revenue at of the not fixed the time contribution. rulings to define term the when Code contingent this value is and indefi- Because silent, plain language the statute is is nite, Appellants argue the obli- ambiguous, legislative history and the is gation is not a Comm’r, uninstructive. See Foil 920 section 752. 1196, Cir.1990).6 F.2d Because simply This case cannot resolved Code, regulations, legisla and the referring “liability” to the definition of tive history provide do not a “precise and Dictionary. Although Law Black’s comprehensive” liability, definition of “we obligated” in- “legally Trust was to return next look to the interpre Commissioner’s kind securities to DLJ the moment the tation” as reflected in IRS ruli revenue 27, short sale was initiated on December Foil, 1201; ngs.7 920 F.2d at also St. 1999, “pecuniary this obli- value of Sys. David’s Health Care v. United gation” at the time the Trust contributed (5th Cir.2003) (“A 232, recent brokerage account to Valiant is not IRS ruling provides stаrting revenue Indeed, obvious. central point analysis.”). for our argument obligation is that the close Before we discuss the substance liability” “contingent of these rulings, revenue we must address falls outside the section 752. purview of the level of deference owe them. The deals with dol- Internal Revenue Code lars, Rulings “Revenue do not adjustment provisions pre have basis sumptive of section 752 force and effect of but presume that value law case, merely persuasive ascertainable. as the Commissioner’s we believe that statutory close official interpretation provi- 752, many partner well as other relying Section as 7. Because the Government is on these K, ship provisions rulings three Subchapter revenue to define a term in a was enacted statute, regulation, federal part as Code Internal Revenue of 1954. concept of Seminole Rock deference is not August See Act of Pub.L. No. implicated. See Bowles Seminole Rock & legislative history 68A Stat. does Co., 410, 414, Sand U.S. 65 S.Ct. meaning not address the of the term "liabili (1945) (an agency's interpreta L.Ed. ty." merely explains It 752 was section regulation tion of its own is entitled to “con partner's intended to of a deal with ‍​‌‌​‌‌​‌​​‌‌​‌‌‌‌​‌‌​‌‌​​​​​​‌‌‌​‌‌​​​‌‌‌​​‌​​​‌‍effect trolling weight plainly unless it is erroneous assumption liabilities regulation’’); inconsistent United partnership’s assumption partner’s of a liabil 218, 246, Corp., States v. Mead U.S. S.Rep. 83-1622, (1954), ities. See No. at 405 (Scalia, J„ (2001) S.Ct. 150 L.Ed.2d 292 4621, 5047; reprinted as in 1954 U.S.C.C.A.N. ("[T]he dissenting) Court leaves untouched to H.R.Rep. accord No. at S236-237 day[ principle] judges ] [the must defer to (1954), reprinted in 1954 U.S.C.C.A.N. agency interpretations reasonable of their 4017, 4376-4377. Gonzales, regulations.”); own 544, Ali (5th Cir.2006).

453 Comm’r, to used in the Power, precedents disposi- 46 be Ltd. v. vide Sealy sions.” (5th Cir.1995). cases, may cited and 382, Neverthe- of other be 395 F.3d significant weight less, usually upon purpose.”). “accord for that Despite we relied of the IRS in fact, the determination Government that rev- argues rulings.” David’s Health Care St. revenue rulings enue should be entitled Chevron circuit, at n. 9. In this 239 Sys., 349 F.3d deference, meaning that we re- would be respectful “entitled to rulings are revenue them the IRS’s quired follow unless generally “given are consideration” and “arbitrary, of statute interpretation of expressing the studied view weight as manifestly contrary to the caрricious, or duty carry it out agency whose USA, statute.” Chevron Inc. v. Natural Foil, (quo- at 1201 statute.” 920 F.2d Council, 837, Inc., 844, 467 Res. U.S. Def. omitted). disregard will marks We tation (1984). 2778, S.Ct. 81 L.Ed.2d 694 104 ruling it “conflicts with the statute if rul- role that revenue prominent Given interprets, with the statute’s supposedly analysis, play subsequent in our ings history, ifor is otherwise legislative [it] argument. compelled to address this feel examining the rea- unreasonable.” Id. McLendon, at & n. 12 135 F.3d 1023-24 Cf. interpretation IRS’s sonableness has (noting Supreme that the Court been term, we will cer- statutory undefined “conspicuously regarding appli- silent” the definition con- tainly consider whether cability to revenue of Chevron deference ruling comports in the revenue tained rulings). meaning and avoids plain term Johnson, 120 at consideration, F.3d absurd results. After careful we conclude Cf. with our position This is consistent rulings revenue are not entitled ex- “any deference previous deference, statement we will continue to Chevron evaporates a revenue ruling tended to our standard. Govern- apply previous contrary statutory face of clear and acknowledges rulings that revenue ment Estate McLеndon language.” to the no- promulgated pursuant not are Comm’r, 1017, n. 10 1023 Ad- procedures tice-and-comment Schleier, Cir.1998); also 515 Comm’r (APA).8 Act ministrative Procedures See 8, 2159, n. 132 S.Ct. U.S. Coverdale, Tax F. Court Review John (1995) (stating that revenue L.Ed.2d 294 Rulings in the Regulations and Revenue rulings “may not be used to overturn Era, 35, 64 Geo. Chevron L.Rev. Wash. statute”). language plain (1995). Although notice-and-comment qua not sine non of rulemaking is and the Fifth Both Cir deference, Corp., see Mead Chevron revenue are rulings cuit have stated that 230-31, other at 121 S.Ct. Su- U.S. treasury to less deference than entitled precedent suggests reve- preme Court McLendon, See regulations. are entitled to Chevron rulings nue (revenue “clearly rulings less v. Harris deference. See Christensen treasury regu binding the courts than 576, 587, 120 S.Ct. 601.601(d)(2)(v)(d) County, 529 U.S. lations”); 26 C.F.R. (2000); v. United Davis (“Revenue 146 L.Ed.2d ... not have the Rulings do 472, 484, 110 S.Ct. 495 U.S. Treasury Department force and effect of (1990). ..., published pro- 109 L.Ed.2d Regulations but are request 1995-14 I.R.B. occasionally com nouncement The IRS does 1995). appears rulings (April This the WL 107761 proposed revenue ments on See, exception than rule. e.g., rather Bulletin. An Internal Revenue 454 111-2, has not identified “oth- see Dep’t

The Government Treas. Order No. 1981-21 reasonably 18, suggesting 26, 1981), er circumstances I.R.B. (May 1981 WL 127095 thought published, that ever Congress are Reg. [revenue] both see Treas. deserving 601.601(d)(2)(i)(a), § rulings [Chevron] defer- we believe that Mead, ence claimed for them here.” 533 lack of notice-and-comment and the IRS’s 2164; 231, 121 see divergent U.S. at S.Ct. also Kris- own treasury regu- treatment of Hickman, Coloring E. tin Outside the lations and rulings dispositive revenue (Lack Examining Treasury’s of) Mead, Lines: the deference issue. See 533 U.S. 230, Compliance (“Thus, with Administrative at Proce- 121 S.Ct. 2164 the over- Rulemaking Requirements, Act whelming dure 82 number our applying cases 1727,1804 (2007) n.365 Chevron deference have reviewed the L.Rev. Notre Dame (noting taxpayers disregard that who reve- fruits notice-and-comment rulemaking Christensen, rulings judged nue are under a more adjudication.”); le- formal 529 587, nient standard for of the under- U.S. 120 (“Interpreta- S.Ct. 1655 payment penalty taxpayers than those such opinion who tions as those in letters —like treasury file return inconsistent with a interpretations in policy contained state- (“It Coverdale, ments, regulation); supra, manuals, at 87 agency and enforcement Congress implausible intended to guidelines, all which lack the forсe grant Treasury authority to formulate Chevron-style law—do not'warrant defer- format.”). binding policies in this informal ence.”); Coverdale, supra, (“By at 86 choosing to issue a Ruling rather particular statutory provision “[A] a regulation, than an- IRS effect qualifies for Chevron deference when it nounces that it does intend to exercise appears Congress delegated authority authority way in a that would make agency generally to make rules car Chevron deference appropriate.”). law, rying force of agency Furthermore, other circuit claiming courts have interpretation pro deference was uniformly held that mulgated rulings in the revenue are authority.” exercise of Mead, not entitled to Chevron deference.9 533 U.S. at 121 Aero S.Ct. 2164. Comm’r, quip-Vickers, Inc. assuming Even that revenue rulings satis 347 F.3d (6th 173, Cir.2003); fy test, 181 prong of the Mead first Omohundro States, (9th 7805(a), they clearly United 300 F.3d fail the sec 1069 Cir.2002); treasury ond. regulations, Unlike Del Props., IRS Commercial Inc. v. Comm’r, authority (D.C.Cir.2001); does not invoke its make F.3d rules Comm’r, law Chicago the force of when First NBD promulgating Corp. v. rulings. revenue Cir.1998); Galler, C.F.R. F.3d Linda 601.601(d)(2)(v)(d). Although both trea Judicial Rulings: to Revenue Defеrence sury regulations and rulings Standards, revenue Reconciling Divergent 56 Ohio (1995) ultimately authorized at the 1037, 1063-68 same level of St. L.J. (reviewing the Department and the Treasury, given deference rulings revenue by the (Chevron deference) 9. Some cases and commentators (citing have noted City Johnson that the Sixth Circuit CenTra, States, afforded Chevron-like Inc. v. United F.2d rulings deference to early revenue in the (6th Cir.1992)). Aeroquip- See, Telecom*USA, e.g., 1990s. Inc. v. United Vickers,the Sixth Circuit held that the CenTra States, (D.C.Cir. 1073 & n. 8 abrogated line of Supreme cases 1999) ("Chevron-like” deference) (citing John Court's decisions in Christensen and Mead. City son Med. Ctr. v. United 347 F.3d at 180. (6th Cir.1993)); Galler, 975-76 supra, at

455 Skidmore, Coverdale, apply and we compatible pre-1995); circuit courts (same). today.10 that standard n. supra, at 333 82 Rulings Because Revenue -Mead, courts the various circuit Post 95-26, and 95-45 are not entitled to Chev that reve- this issue have held addressing deference, ron we must consider whether def- are to rulings entitled Skidmore nue persuade. power to The they have See, Aeroquip-Vickers, 347 e.g., erence. particular of deference owed to a degree Mead, Supreme Court F.3d at 181. ruling upon several depend revenue will vitality of Skid- affirmed the continued thoroughness evi disjunctive factors: “the deference, gives agency’s more which consideration, the validity dent in of its its whatever interpretation “some deference consistency its with earlier and reasoning, form, specialized experience given its all those pronouncements, later and factors investigations informa- and and broader if power lacking to give persuade, which given to and agency, available power to control.” Skidmore & Swift its uniformity administrative value 134, 140, Co., 65 S.Ct. 89 323 U.S. understandings what a na- judicial and Foil, (1944); 124 see also 920 F.2d L.Ed. Mead, requires.” at tional law U.S. factors). (identifying at 1201 other For (citation quotation and S.Ct. below, taking after the reasons discussed omitted). agency inter- marks Reasonable factors, believe that account these into not involve notice-and- pretations do rulings should be af these three revenue per- carry “at least some added eomment weight.” St. “significant forded See respect may and “seek suasive force” Sys., 349 F.3d at 239 David’s Health Care persuade.” to power proportional [their] n. 9. (citations 235, 121 Id. at S.Ct. 2164 omitted). can quotation We discern marks gives a factor which revenue One pre- appreciable difference between our its ruling power persuade reason its viously and the Skid- enunciated standard Foil, See 920 F.2d 1201. We ableness. Power, Sealy 46 F.3d more standard. See struck the absurd re particularly are (revenue “merely per- are rulings at 395 accepted arise if we sult would (revenue Foil, suasive”); at 1201 920 F.2d argument that the Appellant’s “given weight expressing rulings are not a close short sale is IRS) (quotation are the studied view” We reluctant purposes of section 752. omitted). ex- adopt any We believe our definition of marks Con the level of the manifest intent of isting jurisprudence regarding would defeat contin- gress the Trust to rulings fully and would allow deference owed revenue deference), Corp. Hosp. Am. & subsequent analysis require will also ron 10. Our Comm’r, treasury regulations. consideration of various Subsidiaries challenge Cir.2003) do (6th (same); Because the see also Kristin E. regula validity applicability of these Hickman, Rejecting Mead: Tax Need for tions, we need not address the level of defer Deference, Exceptionalism in Judicial 90 Minn. Compare post applicable to them -Mead. ence (2006) (noting that the 1556-59 L.Rev. Comm’r, Snap-Drape, Inc. v. split over whether Chevron circuit courts are 1996) "legislative” (holding that trea Cir. judicial apply ‍​‌‌​‌‌​‌​​‌‌​‌‌‌‌​‌‌​‌‌​​​​​​‌‌‌​‌‌​​​‌‌‌​​‌​​​‌‍review of should deference deference, given sury regulations are Chevron regulations); treasury 5 U.S.C. all treasury regulations "interpretive” but 553(b)(3)(A) "interpretative (exempting Comm’r, not), Holding, with Swallows Ltd. proce notice-and-comment rules” from the (3d Cir.2008) (holding that F.3d APA). dures of treasury regulations to Chev- are entitled all Treasury- ue raid on the A conspicuous its partners do not recognize a gain use of this tax shelter.11 or loss if through contributes our begin Before we excursion into Sub- exchange for a interest. K, be if did chapter we would remiss we 721(a). § In for exchange the con- elephant on the in comment the room. tribution, the partner partner- receives a acknowledges The Trust it suf- ship interest with an outside basis that is $200,000 a in fered economic loss connec- equal “the money to amount of such transactions, yet tion with these it claimed adjusted basis of such a Million tax on its return. loss $102.6 contributing partner at the time of the The Trust used this loss in fake contribution.”12 Id. 722. GMK calculat- legitimate offset over Million in income $2 ed its outside by treating basis both the $2 capital gains in 2000 and 2001. The deposit Million initial and the Mil- $102.5 Appellants’ premeditated attempt trans- proceeds lion short sale as cash that was (for form this wash transaction economic contributed to the under sec- (for purposes) into a windfall tax purposes) 722, resulting tion in an equal outside basis is reminiscent of an alchemist’s attempt to the cash Reg. contribution. See Treas. gold. transmute lead into § 1.722-1. Because GMK concluded that a obligation to close short sale was not D. Calculation GMK’s Outside Basis liability, rely a it did not on section 752 to

and Amount Realized adjust its in outside basis Valiant. The Government agrees that the Mil- $2 argues The Government the obli- lion initial deposit and the $102.5 gation to close a short is a sale proceeds were cash contribu- purposes of section and the value tions that increased GMK’s outside basis equal proceeds the initial by in Valiant the total amount of the con- of the short sale. On D Schedule of its However, tribution. the Government also Form GMK stated that its outside believes that GMK’s outside must basis be basis in its interest in Valiant adjusted under section 752. Both the Million. Government $104.5 agree figure and the that this partner’s A by outside basis is affected however, parties, correct. The arrive partner’s share of partnership debt. figure by relying same on different “[A]ny in partner’s decrease individual sections of the Code. by liabilities reason of the assumption by reviewing Comm’r, we Because this case at the ence. P’ship See ACM v. F.3d summary judgment stage, express opin- (3d ("Tax Cir.1998) losses such as ion on the fact-bound issue whether this correspond these ... which do not particular transaction is invalid under the losses, actual economic do not constitute the step-transaction economic substance doc- type of 'bona fide’ losses that are deductible Computer Compaq Corp. trines. Comm’r, See under the regula Internal Revenue Code and (5th Cir.2001). tions.”); (b). Reg. § Treas. 1.165 — 1 But see True United (10th Cir.1999) (holding appli- that the partner’s 12. A basis in his interest cability step-transaction of the doctrine can basis,” is called his partner- "outside and a be summary judgment decided stage at the ship's basis in its assets is referred to as its cases). simply some We find that the Com- Kligfeld "inside Holdings basis.” See missioner's desire to define term "liabili- Comm'r, 192, 195-96, 128 T.C. WL ty” prevents in manner a taxpayer from (2007). deducting imminently non-economic losses is reasonable for of Skidmore defer- liability.13 See Treas. Trust’s share individual liabili partnership of such (1). Ex. Reg. 1.752-1(g), ties, as distribution shall be considered money by partnership,” the partner of sec- Although Government’s use partner’s outside will reduce the which GMK’s outside 752 does not reduce interest. Id. the partnership basis Million, Valiant below basis $104.5 733(1). 705(a)(2), 752(b), Conversely, §§ part- attribute share does 99.99% partner’s part share any increase in the contrast, nership to GMK. shall considered as liabilities nership GMK claimed ignoring section money such contribution Million outside basis Valiant will which increase partnership, claiming its corre- tax return without partnership in the outside basis partner’s part- the of Million sponding $102.5 share 705(a)(1). 752(a), §§ When Id. interest. nership liability. reasoning, Based on basis, outside sec calculаting partner’s the only it realized $1.8 claimed that GMK 752(a) (b) together. be read and must tions sale, which not be on the should Million of indi partner’s in a share Any decrease GMK was not relieved increased because 752(b) is under section vidual liabilities liability recognized section any under of in his share against any increase netted it sold Valiant to Czerwinski. 752 when from the arising partnership liabilities 752(a); section transaction under same entity approach, Under triggers decrease net increase or is treated as partnership of a interest sale contribution or distribution a deemed asset, unitary capital disposition 1.752-1(f). Reg. § Treas. cash. See generally recognizes gain or the transferor equal to difference his loss between in Valiant has a substituted basis GMK his See realized and outside basis. amount original outside equal to the Trust’s that is 741, 742, case of a §§ the Trust contrib in Valiant. When basis interest, partnership of a liabilities Valiant, it brokerage account uted the in manner as liabilities treated in the same an Million cash and $104.5 contributed exchange of with the sale or connection Assum obligation to closе the short sale. partnerships. not associated with property close a short sale ing obligation that the 752(d). Thus, amount realized in Id. liability, outside basis the Trust’s transfers his by a who brokerage after the transfer Valiant and the fair only cash interest includes not equal Million cash to the account $104.5 re 722) other market value of (per section minus contribution share of the transferor’s also by Valiant ceived but liability assumed Million $102.5 by the 752(b)) assumed liabilities Million plus (per section $102.5 1.752—1(h), §§ Reg. Treas. See liability attributable transferee. share of 1.10 (3); 752(a)). 01-2(a)(1), also Comm’r Ex. Because Trust section (per 103 S.Ct. Tufts, 461 U.S. in Val Trust owned a 99.99% interest (“When (1983) encumbered liability by 75 L.Ed.2d 863 iant, assumed the amount of disposed of or otherwise by property is sold completely offset Valiant liability. In this transferred unnecessary rata share might appear $102.5 to add It case, 752(a) (b) com- amounts the section immediately and then subtract 752(b) hap- because GMK requires pletely each other us to offset same amount. Section partnership interest pened partner's to own 99.99% basis the total reduce the outside Valiant, GMK to a which entitled 99.99% part- transferrеd amount under 752(a) partnership’s liabilities only requires share of nership, us but section 752(a). pro section partner’s his outside basis increase purchaser mortgage, and the assumes the liabilities is an treated as amount realized extinguishment of the associated the mort under section 1001 and the regulations gagor’s repay thereunder.”) added). is accounted for (emphasis Now we computation the amount real parties’ must address which calculation is ized.”). a partnership A sale of interest correct. discharge

triggers deemed the trans- feror’s of partnership share liabilities. See E. The Rulings 2(a)(4)(v). §id. 1.1001 — 19, 1988, September On over a decade Government, According to the when before the Trust engaged in these transac- GMK sold interest to Czer- Valiant tions, the IRS Ruling issued Revenue 88- Million, it winski for was also relieved $1.8 1988-2 C.B. 1988 WL liabilities, of its of partnership share which which defined under section 752 to must be treated additional amount “include an obligation only if and to the Thus, realized on GMK sale. realized extent that incurring creates a total of Million under section or increases the basis to the partnership of 752(d) when sold its interest in Valiant partnership’s of the (including assets ($1.8 to Million promissory Czerwinski cash borrowings).” attributable to In this + note Million from relief its share $102.5 case, the Million in cash proceeds $102.5 liability). of partnership GMK’s loss is from the short sale increased the Trust’s by subtracting calculated its outside basis outside basis under section 722. The cash from its amount $104.5 realized received in the short sale was an asset of Million, for a total $104.3 loss of partnership, part- and the basis $200,000. nership’s Thus, assets was increased. un- it did not Because treat Valiant’s obli der the liability definition of contained in gation to close the short liability, sale as a 88-77, Ruling Revenue Valiant’s assumed GMK calculated the amount realized on obligation to close the short sale would the sale as Million. If section $1.8 liability constitute a under section 752. applicable, 752 were then GMK would have Citing 88-77, been to attributed a 99.99% share Revenue Ruling of Valiant’s (i.e. explicitly IRS partnership Million), liabilities stated 1995 that “[t]he short GMK’s relief from sale of securities would described in this have ruling been treated as an a partnership additional amount creates liability under 752(d).14 95-26, realized sеction under See 752.” Rev. Rul. Treas. 1995-14 I.R.B. (“If 1.752-1(h) §§ Reg. (1995); partnership a in 1995 WL 95470 see also Rev. Rul. ..., terest is sold reduction 1995-1 C.B. 1995 WL 335770 (1995) partner’s share partnership (applying the principle same transferor confusingly, guish Somewhat the IRS made two between two these theories in their arguments (1) alternative in the briefing, FPAA: adopted the Government has the first GMK’s partnership theory relief from share of position. litigating as its We believe 752(d), liabilities increased its amount under section realized rather than section 752(d); (2) 752(b), section GMK's relief from its controls the treatment of liabilities partnership share of liabilities decreased its when a sells his interest outside basis in Valiant exchange because the sale of the for consideration. William S. triggered interest a constructive McKee, Nelson, William F. & Robert L. Whit 752(b). under distribution section Mathemat- Partnerships mire, Federal Taxation of and Partners same, ically, (2008). the loss calculation is but .05[1][b] To hold otherwise 16 conceptually, quite 752(d) the theories are different. make statutory would section “mere Although Appellants clearly surplusage.” did not distin- Id. imple corpora- Appellants cite to IRS’s obligаtions assumed short-sale menting regulations, which state tions). Ruling 95- to Revenue According a purposes, sale is income tax short “[f]or adjust its outside required GMK until not deemed be consummated deliv [partner- of the “to share basis reflect [its] to close short sale.” ery § 752.” liability under ship] 1(a)(1). Because Reg. Treas. 1.1233 — did not Although Ruling Revenue 95-26 transaction, for “open” sale is an short liability, of the the value address determined gain or loss cannot be which held “the explicitly Ruling 95-45 purchased replacement until securities are liability is the of the amount short-sale lender, and delivered to of basis to which short sale amount taxpayer’s obli argue that value of differently, gave “[t]he rise.” Stated securities is too gation to deliver borrowed equals the of the assumed amount determined contingent and indefinite original short sale.”15 proceeds posi to the date on which the short prior (regarding Rul. short-sale obli closed. Rev. 95-45 by corporations); gations assumed princi- Based on the short sale taxation Advisory, 1997 WL 33313960 Field Service Appel- contained in section ples (Nov. 1997) lia (stating that the basis argue lants cover Ruling bility contained Rev. principles position is not applicable partnerships 95-45 are “[b]e contingent it is a of section because Congress has directed the partner’s [IRS] cause outside obligation. Because consistently with sec in his interest deter- interpret section 752 basis contribution,” 357.”). of mined “at the time the Importantly, Rulings 722, its argues the Trust that I.R.C. 88-77, 95-26, 95-15 were issued before adjusted in cannot be outside basis Valiant this gave that rise to liti the transactions (ie. liability its obli- by Valiant’s assumed gation occurred. securities) replace the borrowed gation to obligation argue that the Appellants The contingent of this obli- the value because is not a replace to the borrowed securities time not ascertainable the gation was ad- liability section which because brokerage transferred the account was partner’s a out- the calculation of dresses to Citing Trust to Valiant. sever- from the in a must be read partnership, side basis rulings, the tax court cases and revenue al ad- conjunction with section which argue “obligations that Appellants that capital gains calculation dresses the unmatured, indefinite or contingent, execu- 1233(a) sales. Section losses short into they taken tory such that cannot be “gain or from the short states that loss until certain purposes account for tax as shall be considered sale in the future do point occur at some events exchange gain or from the sale or loss for purposes not constitute liabilities proper- to extent that the that capital argue asset the The Appellants 752.” to consti- the T-Notes was ty obligation replace ... used close the short sale time at the in the hands of not a under section 752 capital tutes asset in Val- its interest GMK sold taxpayer.” that GMK sold Valiant because at Although agree we moment with district court’s gain its or loss on obligation to GMK could determine time ultimate conclusion according transaction section the short sale sale is under close 752, short T-Notes.” COLM disagree reasoning "the current market rates for with its Producer, F.Supp.2d at obligation fixed at the amount of became iant, assumption so Czerwinski’s Because the a partnership sale of inter- contingent obligation did increase unitary est treated as the sale of a asset, the sale. capital amount realized on section is used to calcu- or gain late on loss the sale. Section argument, Appellants oral At plays no role in this case because the asserted that section 1233 defines whether gain or loss from the short position contingent obligation is a brokerage account is irrelevant to deter- 752. The Appellants section mining adjusted GMK’s outside basis 752 must insist that section follow section Valiant. GMK sold its inter- night day, 1233 as follows but we believe Valiant; est in it did not sale. close short conclusion that a partnership’s “[our] gain or position While loss the short partner of securities creates certainly was relevant the amount that ship liability meaning within the of section willing Czerwinski was pay for Valiant 752 ... not create tension does or conflict (i.e. note), promissory recognition gain with the deferred not relevant calculation of prescribed loss for short sale transactions GMK’s outside basis in that asset. P’ship, under section Salina 1233.” contin- “treat[] [their] Simply at *18.16 put, WL there is gent сontingent assets and ... liabilities link fundamental between section asymmetrically.” See Robert Bird & Alan capital which deals with calculation of Tucker, Tax Sham or sales, Prudent Invest- gains and losses in short and section Deconstructing ment: Government’s which the effect deals of liabili Pyrrhic Victory Partnership in Salina partner’s By ties on a outside basis. Commissioner, 22 terms, Va. Tax Rev. own section purport 1233 does not (2002). If replace scope to define the of the term “liability” borrowed securities was a signifi “contingent under section 752. We will lia- accord bility” cant weight the IRS’s considered did increase the amount judg (made prior sale, ment realized on the proceeds transactions then the case) that, issue in this in the from the case of an short sale should also treated “open” sale, the amount liability “contingent short as a asset” that has no effect purposes equals pro assumed for basis the on the outside basis calculation under sec- original ceeds of the short sale.17 tion 722. The initial short that gener- Although opinions partner, tax court memorandum of the such as at end the the cоurt, precedential have in no value partnership year taxable or when a them, previously upon have relied which indi- partnership al., sells his interest. McKee et they persuasive cates that hold some value. 7.02; supra, at Gibson Prods.Co. United cf. See, States, e.g., Cidale United 1041, 1043, Cir. (5th Cir.2007). 1981) (holding A liability Unit Feb. on the promissory a nonrecourse note was contin- argument, 17. At oral the Government ac- gent mainly because it consisted 80% knowledged that if Valiant had covered the gas production oil future from certain Valiant, position ‍​‌‌​‌‌​‌​​‌‌​‌‌‌‌​‌‌​‌‌​​​​​​‌‌‌​‌‌​​​‌‌‌​​‌​​​‌‍short GMK sold before then wells). wildcat Unlike the situation in Gib- GMK's outside basis in Valiant could have son, replace obligation the the T-Bills was 752(b) adjusted been under section to reflect at fixed the time that the short sale was initi- covering the the actual cost of transaction. ated, liability gov- the amount of that Although liability changes theoretically are by Ruling erned Revenue 95-45. subject adjustment, the id. of continuous Trea- Cf. (creditor 1.752-4(d) sury paid Regulation only would the requires be on note that a partner's produced” share of be "if and liabilities calculated when sufficient oil was wеlls). necessary liability when to determine the tax the from (CCH) Comm’r, 34 In Helmet v. T.C.M. subsequent proceeds ates cash (1975), option partnership a received inter- inextricably covering transaction pursuant agreement giving to an payments Zlotnick, 836 F.2d at 820. To twined. See cer- option purchase a corporation proceeds short sale treat estate. tax court stated that tain real The cash contribution as an unencumbered liability “created no option agreement outside basis in Valiant increases GMK’s part partnership repay on the obligation to close treating without also any in paid perform nor to services funds the face flies in the short sale hold no the future. Therefore we to treat realty. The failure Appellant’s section 752 and the arose under as an partnership liability relief from by be increased partners’ bases cannot realized under section additional amount Ruling In such amounts.” Id. Revenue 752(d) “unwarranted aberrations produced 73-301, C.B. 1973 WL 1973-2 by the in of ... loss realized the amount progress found that unrestricted supra, at al., transferor.” McKee et con- payments two-year construction 7.02[6]. tract are not a under section Rul- argue that Revenue Appellants adjusted out- partner’s that increases ignores because it ing 95-26 is flawed “the Importantly, side basis. law that a “years providing of established required services in performed had all the executory contingent, indeterminate and/or progress to receive the order to entitled determining not obligation is considered obligation payment and there was an such as the basis of asset perform any addi- payment return successfully The Government interest.” Id. tional services order retain it.” upon relied distinguishes authorities Ruling 73-301 are Helmer and argu- by making Appellants this case because distinguishable from none of the cases or Significantly, ment. partnerships did not receive assets those rulings cited revenue obligation. rise to a giving sale, which we consider involve Ruling 1975-1 C.B. In Revenue unique transaction. the IRS stated that 1957 WL computing the cost basis assets “[i]n Comm’r, 51 T.C. Henricks recognize does purpose, [IRS] (1968), F.2d 485 1968 WL aff'd in an taxpayer reflected (4th Cir.1970), tax court held that the executory perform- prior contract taxpayers capital losses sustained However, in the ance of the contract.” in the tax sale were deductible short sentence, ex- the IRS noted that the next actually that delivered year taxpayer the taxpay- “cost the ecutory contract at issue to close the securities to the lender the him” in nothing a zero basis to er has [and] year that the position, not tax short gain or Id. his ultimate loss. computing actually pur securities were replacement at 235. lan by taxpayer. general chased T.C. seize on Comm’r, con simply principle affirms the 71 T.C. Long Henricks in guage (1978), Regulation part in 1.1233- and rev’d in Treasury tained in WL 3318 aff'd 1(a)(1) F.2d 416 grounds, a short sale is not consummat other part on Cir.1981), “has delivery stating to close the that the tax court until ed contin sale; to do a number of occasions that nothing held on short has by liabilities assumed gent in and indefinite partner’s of a outside basis calculation not part of an asset are purchaser interest. his of the asset. think gated by the cost basis We the IRS after 1995. See Treas. 1(a)(4)(i) in partnership liabilities should be treated Reg. § (adоpting the defi 1.752 — 71 T.C. at 7-8. the same manner.” How- liability nition of contained in Revenue ever, Long 88-77). claims in arose from struc- Ruling building partner- tural in a that the defects erected, and the in

ship claims LaRue had III. Conclusion Comm’r, T.C. WL We obligation conclude that the to close (1988) a partnership’s arose from contrac- liability a short sale is a replace missing property. tual obligation express section no opinion 752. We on the correctly The Government observes that parties. other issues raised doWe 57-29, Long, Ruling Revenue and LaRue note, however, that the Seventh Circuit obligations not involve or did created recently held that offsetting option the basis of the partnership increased as- variant Son BOSS tax shelter was in example, Long, sets. For the tax court invalid under Treasury Regula retroactive taxpayer held that the could not increase Cemco, 1.752-6. 515 F.3d at 752- his initial outside basis terms, By its treasury regu own this partnership’s contingent liability until the lation applies if a partnership as lawsuit) (a liquidated had a value. 71 T.C. liability sumes a of a partner “other than at 8. claim liquidated, Before the this 752(a) (b) liability to which section and part- did not create or increase 1.752-6(a). apply.” Reg. § Treas. Be ner’s outside basis his inter- obligation cause we find that the close contrast, “contingent liability” est. is to which section immediately in this case increased the 752(a) (b) and apply, we conclude that this Trust’s outside basis Valiant from $2 regulation inapplicable to this case.18 Million to Million. AFFIRMED. Skidmore,

Under we believe that Reve Rulings nue 95-26 and 95-45 are reason KING, Judge, Circuit concurring: they able because reflect the Commis prevent taxpayers sioner’s desire to from I concur in judgment panel deducting Greg non-economic losses. panel’s and opinion. I sepa- write Cf. ory 465, 470, 293 U.S. Helvering, rately express my unease with what we (1935). S.Ct. 79 L.Ed. 596 doWe have been asked to do here. The basic the Appellants believe that problem were un underly- with this case fairly surprised prejudiced by ing absolutely transactions have no eco- IRS’s challenge shelter be nomic substance. The Internal Revenue they cause were notice early as Service seeks a rule of law from circuit certainly case, that the IRS dispose others, court to of this considered the being put expense close short without delay sale to be a under litigating section 752. of question fact-bound wheth- Ruling distinguishable 95-26 is er these transactions should be recharac- from the earlier cases revenue rul terized tax purposes no- under the ings Appellants, cited step-transactions economic-substance and fully regulations promul- consistent with doctrines. result is a rule of law Government, According 18. purview ties fall outside the of section promulgated regulation this retroactive to ad- involving dress contingent tax shelters liabili- pretense, is here addressing what undertaking.

unsettling America, STATES

UNITED

Plaintiff-Appellee, SANCHEZ, Defendant-

Darrell

Appellant. 07-30578.

No. of Appeals, Court States

United

Fifth Circuit.

May Notes and trust, transfers between limited two Ramey, Inabnett, (LPs), Cole B. individual, Crouch & partnerships Jef- and an frey (argued), Lynn, (the Mark Trust) Tillotson Tillot- Family Ettman Trust reported Dallas, Pinker, TX, & for son Plaintiffs- a short-term capital approximately loss of Appellants. Million on 1999 tax return de- spite fact that suffered an eco- (argued), Joan I. Oppenheimer Richard nomic approximately $200,000 loss of Farber, Bradshaw S. Rothenberg, Gilbert connection those with Be- transactions.3 Justice, Dept, of Tax App. U.S. Div. Sec- cause non-corporate taxpayers carry can tion, DC, Johns, Washington, Michelle C. capital unused loss forward to succeed- Div., Dept, Justice, Dallas, TX, U.S. Tax ing exhausted, years taxable until it is for U.S. trust used artificial capital loss in 1999 legitimate offset its capital income and gains in 2001. 2000 and acronym 11, (2007). 1. "TEFRA” is an for the Equity Tax 80 Fed.Cl. 57 n. Although 83 1982, Responsibility and Fiscal 97-248, Act of Pub.L. there are variants several BOSS Son of (1982), Stat. 324 it was enact- (e.g. tax shelter the short sale variant and the improve auditing adjustments ed "to variant), offsetting option they rely all on the " partner- of income tax items attributable to principles. same common Id. 'Son of States, ships.” Alexander v. United 44 F.3d BOSS’ steps uses a series of contrived in a 328, Cir.1995). TEFRA established partnership generate interest to artificial tax single procedure "a determining unified for designed losses to offset income from other the tax treatment of all items at Pietruszkiewicz, supra, transactions.” at 981 level, rather than separately ("Tax n. 3. In IRS Notice 2000-44 Avoidance Comm'r, partner Callaway level.” using Basis”), Artificially High which was 106, (2d Cir.2000); generally see published Septembеr the IRS §§ I.R.C. alerted taxpayers that the Son of BOSS scheme had been "listed” as an abusive acronym "BOSS” is an for Op "Bond and 1138430; shelter. WL also Strategy” tion Sales and refers to an abusive 2003-020, Chief Counsel Notice IRS CCN Pietruszkiewicz, Christopher tax shelter. M. CC-2003-020, (June WL Summonses, Required Records and Of Artifi 2003). Liberating Itself, cial Entities: the IRS from (2004). Miss. L.J. 921 n.2 Son of BOSS is a slightly figures opin- variation of the older 3.All dollar BOSS tax rounded in this States, shelter. Trading, Jade L.L.C. United ion. B. The Transactions the Internal September On (IRS) notices of mailed Revenue Service many complex tax shelters it was “Like adjust- partnership administrative final ” simple principle but .... detail (FPAA) Associates, & to Kornman ment Investors, L.L.C. Cemco United (K&A), the tax matters Inc. (7th Cir.2008). 749, 750 On De- (Valiant), L.P. Investments Valiant 23, 1999, opened cember the Trust a bro- (Colm), Producer, the tax to Colm Inc. Donaldson, kerage account at Lufkin & II, partner of L.P. matters GMK-GMK (DLJ) deposit ‍​‌‌​‌‌​‌​​‌‌​‌‌‌‌​‌‌​‌‌​​​​​​‌‌‌​‌‌​​​‌‌‌​​‌​​​‌‍Jenrette cash of $2 (GMK). 23, 2003, K&A and December On 27, 1999, the Million. On December Trust readjust- timely for petitions filed Colm margin deposit used this and executed district items ment (face value) T- short sale of $100 6226(a)(2). On Feb- court. See Trust Notes. This meant bor- 19, 2004, timely ruary the Trust filed a rowed from DLJ and then the T-Notes readjustment of partnership petition open sold them on the market. This short court items both LPs. district generated proceeds approxi- cash sum- motion for granted the Government’s

Case Details

Case Name: Kornman & Associates, Inc. v. United States

Court Name: Court of Appeals for the Fifth Circuit

Date Published: May 12, 2008

Citation: 527 F.3d 443

Docket Number: 06-11422

Court Abbreviation: 5th Cir.