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Subject:  Re: Wash sales between taxable and tax-deferred Date:  11/27/1999  4:37 PM
Author:  TMFTaxes Number:  21865 of 121182

TMF Taxes said...

<<But more importantly, there are many court cases out there that say that if you have "control" of the account (as in a self directed IRA account) that the account will be treated as "yours" for purposes of wash sale (and other) rules. I'll be happy to provide some citations if you would like, Jack. Just let me know."
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And Jack replied...

<<Would like to read the most recent cases if you have the citations. My understanding is that the transactions must be "taxable" or you have contradictory basis applications between taxable and nontaxable "taxpayers.">>

To which I sez...

Sure.

First...we disagree on the interpretation of section 1091. There is nothing there (in my reading) that tells me that the transaction must be taxable. I'll reprint 1091(a) here so that we can read it together:

<<In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under section 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business. For purposes of this section, the term "stock or securities" shall, except as provided in regulations, include contracts or options to acquire or sell stock or securities.>>

Note in the parenthetical comment where it says "by purchase or by an exchange on which the entire amount of gain or loss was recognized by law". That says to me that the wash sale rules could be triggered by EITHER a purchase OR by an exchange on which the entire amount of gain or loss was recognized by law". I don't think that the second part of the statement necessarily applies to the first.

Now...let's look at the "related party" or "controlled group" issues. I think that you'll agree that Code Section 1231 states that various losses will not be recognized if they are made between "related taxpayers".

When the words "related parties" are used, many people think of "family". But the law goes far beyond that. Additionally, the "related party" rules even go so far as to identify when somebody "constructively" owns shares of stock. A close review of those provision indicate that related parties include:

1) A grantor and fiduciary, or the fiduciary and beneficiary, of any trust.
2) Fiduciaries of two different trusts, or the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts.
3) A trust fiduciary and a corporation of which more than 50% in value of the outstanding stock is directly or indirectly owned by or for the trust, or by or for the grantor of the trust.
4) A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital interest, or the profits interest, in the partnership.
5) Two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation.
6) Two corporations, one of which is an S corporation, if the same persons own more than 50% in value of the outstanding stock of each corporation.
7) An executor and a beneficiary of an estate (except in the case of a sale or trade to satisfy a pecuniary bequest).
8) Two corporations that are members of the same controlled group (under certain conditions, however, these losses are not disallowed but must be deferred).
9) Two partnerships if the same persons own, directly or indirectly, more than 50% of the capital interests or the profits interests in both partnerships.

Does any of this sound like it could be applied to a self-directed IRA relationship and the owner? It sure does to me.

If I understand your position, you believe that the related party rules don't apply to wash sales...but apply to rather to regular sales and exchanges. But I'm not so sure.

One of the more interesting cases regarding this issue is Shoenberg (Shoenberg v. Commissioner of
Internal Revenue, 77 F.2d 446 (8th Cir.), cert.denied, 296 U.S. 586(1935)). It's not recent, but it's one that I find on point.

The taxpayer in Shoenberg sold individually owned corporate stocks through a broker on December 5, 1930. The same day the broker purchased equal shares of the identical stocks for the same prices in the name of an
investment company controlled by the taxpayer.

Slightly more than 30 days thereafter the taxpayer purchased the stocks from the investment company
at the current market price, slightly below the price at which he had sold them through the broker. The taxpayer claimed a loss on his 1930 income tax return based on the December 5 sale of the stocks at prices below his tax basis. The court agreed with the taxpayer that there was an actual sale. This satisfied the requirement that the loss be "realized" by some
completed "identifiable event." However, the court concluded that it could look beyond the form to the substance of the entire transaction. In denying the deduction, the court stated:

To secure a deduction, the statute requires that an actual loss be sustained. An actual loss is not sustained unless when the entire transaction is concluded the taxpayer is poorer to the extent of the loss claimed; in other words, he has that much less than before.

A loss as to particular property is usually realized by a sale thereof for less than it cost. However, where such sale is made as part of a plan whereby substantially identical property is to be reacquired and that plan is carried out, the realization of loss is not genuine and substantial; it is not real. This is true because the taxpayer has not actually changed
his position and is no poorer than before the sale. The particular sale may be real, but the entire transaction prevents the loss from being actually suffered. Taxation is concerned with realities, and no loss is deductible which is not real.

I can't get my hand on the cases right now, but I think that the Willard Platt and Irwin Eisen case deal with the same issues of control.

There are certainly others cases and rulings that deal with this issue. If you would like more of them, please let me know via e-mail and I'll be glad to give them to you.

Again, please don't misunderstand. I don't know the right or wrong answer to this question. I simply take the position that I believe that the IRS could make a very good claim that trading between your taxable and tax deferred account could constitute a wash sale. Potentially...either way.

You may be right, and I may be way wrong. But as I said in my original post, I'm not going to test the waters on this issue. I'll leave it for somebody with a much larger E&O policy limit. Mine's only $1 million.

Hope this helps...
TMF Taxes
Roy

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