Summary
holding that Tax Court's Miller opinion "will no longer be followed"
Summary of this case from Landreth v. C.I.ROpinion
Docket Nos. 28059-85 29428-85.
1988-07-26
WILLIAM R. BOSWELL AND JUDY M. BOSWELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWILLIAM R. BOSWELL AND AGNES C. BOSWELL, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Robert E. Panoff, for the petitioners. Theodore J. Kletnick and Nancy B. Romano, for the respondent.
During 1979 and 1980, taxpayer, an investor as opposed to a dealer, entered into commodity straddle transactions and claimed ordinary loss deductions relating thereto. HELD, under section 108(a) of the Tax Reform Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630, as amended by section 1808(d) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2817-2818, losses relating to commodity straddle transactions entered into before June 23, 1981 are deductible if the taxpayer's primary motive for entering into the transactions was to realize an economic profit. Because of the 1986 amendment to sec. 108(a), this Court's opinion in Miller v. Commissioner, 84 T.C. 827 (1985), revd. 836 F.2d 1274 (10th Cir. 1988), will no longer be followed. Robert E. Panoff, for the petitioners. Theodore J. Kletnick and Nancy B. Romano, for the respondent.
OPINION
, JUDGE:
This matter is before the Court on the parties' cross motions for summary judgment. The stipulated legal issue for decision concerns the test for determining whether commodity straddle transactions were entered into for profit within the meaning of section 108(a) of the Tax Reform Act of 1984, Pub. L. 98-369, 98 Stat. 494, 630, as amended by section 1808(d) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2817-2818. Hereinafter, all references to ‘section 108‘ will be to section 108 of the Tax Reform Act of 1984, supra. References to ‘amended section 108‘ will be to section 108, as amended by section 1808(d) of the Tax Reform Act of 1986, supra.
Petitioners contend that the profit-motive test of section 108(a) and amended section 108(a) requires only that commodity straddle transactions entered into by a taxpayer, who is not a dealer, have a reasonable prospect of realizing any profit, regardless of the motive of the taxpayer for entering into the transactions. Respondent, on the other hand, contends that even if the transactions, in light of the vicissitudes of the marketplace, have a reasonable possibility of realizing any profit, the test of section 108(a) and amended section 108(a) requires that the taxpayer's primary motive for entering into the transactions must be to realize a profit. The parties have stipulated a settlement of all other legal and factual issues, including what deductions and other tax benefits will be allowed with respect to the straddle transactions depending on which for-profit test the Court adopts.
In timely statutory notices of deficiency, respondent determined deficiencies in petitioners' 1979, 1980, and 1981 Federal income taxes and an addition to tax as follows:
+---------------------------------------------------------+ ¦ ¦ ¦ ¦Addition to tax ¦ +----+----------------------+----------+------------------¦ ¦Year¦Petitioners ¦Deficiency¦sec. 6651(a)(1) ¦ +----+----------------------+----------+------------------¦ ¦1979¦William R. Boswell and¦ ¦ ¦ +----+----------------------+----------+------------------¦ ¦ ¦Agnes C. Boswell ¦$55,664 ¦--- ¦ +----+----------------------+----------+------------------¦ ¦1980¦William R. Boswell and¦ ¦ ¦ +----+----------------------+----------+------------------¦ ¦ ¦Judy M. Boswell ¦85,535 ¦$13,599.75 ¦ +----+----------------------+----------+------------------¦ ¦1981¦William R. Boswell and¦ ¦ ¦ +----+----------------------+----------+------------------¦ ¦ ¦Judy M. Boswell ¦129,131 ¦--- ¦ +---------------------------------------------------------+ Petitioners resided in Temple Terrace, Florida, at the time their petitions herein were filed. Petitioner William R. Boswell timely filed a joint Federal income tax return for 1979 with his then-wife, Agnes C. Boswell. Mr. Boswell timely filed joint Federal income tax returns for 1980 and 1981 with his then-wife Judy M. Boswell. Hereinafter, all references to petitioner will be to William R. Boswell.
During 1979 and 1980, petitioner owned a 1.98-percent limited partnership interest in Worcester Partners. Worcester Partners engaged in commodity straddle transactions with respect to options in United States Treasury bills. These transactions will be referred to hereinafter as the ‘Worcester T-Bill straddle transactions.‘
The parties have stipulated that the Worcester T-Bill straddle transactions were executed through Arbitrage Management Investment Co. and in all relevant respects are the same as the Treasury bill straddle transactions involved in Fox v. Commissioner, 82 T.C. 1001 (1984). We described those straddle transactions as follows:
All of the »taxpayer's† transactions were in put options, which are options to sell an underlying security at a particular price, on or before a particular date. All of »taxpayer's† transactions in put options were structured to establish positions known as vertical put spreads. A spread is a hedged position comprised of two substantially offsetting options positions. With a given change in the price of the underlying security, one option will appreciate in value while the other option will depreciate in value. The spread is ordinarily composed of one ‘long leg‘ — a purchased option — and one ‘short leg‘ — a sold (or granted) option. A vertical spread is a spread comprised of two options with the same expiration date but different strike prices. »Fox v. Commissioner, supra at 1002-1003. Fn. refs. omitted. †
The parties have stipulated that at the time the Worcester T-Bill straddle transactions were entered into, the transactions had the potential to realize a modicum of economic profit, but that the partnership and petitioner did not enter into these transactions with the primary or dominant motive to derive an economic profit therefrom.
On its 1979 and 1980 Federal partnership tax returns (Forms 1065), Worcester Partners reported ordinary losses and short-term capital gains with respect to the Worcester T-Bill straddle transactions as follows:
+---------------------------------------+ ¦ ¦Ordinary losses¦Short-term capital¦ +----+---------------+------------------¦ ¦ ¦on straddle ¦gain on straddle ¦ +----+---------------+------------------¦ ¦Year¦transactions ¦transactions ¦ +----+---------------+------------------¦ ¦1979¦$5,479,342 ¦$1,709,094 ¦ +----+---------------+------------------¦ ¦1980¦6,678,550 ¦10,245,205 ¦ +---------------------------------------+ Petitioner reported his proportionate share of Worcester Partners' ordinary losses and short-term capital gains on his and his wife's 1979 and 1980 joint Federal income tax returns in the following amounts:
+-------------------------------------------------+ ¦ ¦Proportionate share¦Proportionate share ¦ +----+-------------------+------------------------¦ ¦ ¦of partnership ¦of partnership ¦ +----+-------------------+------------------------¦ ¦Year¦ordinary losses ¦short-term capital gains¦ +----+-------------------+------------------------¦ ¦1979¦$111,345 ¦$12,296 ¦ +----+-------------------+------------------------¦ ¦1980¦113,993 ¦ 98,397 ¦ +-------------------------------------------------+ Petitioner also claimed investment interest expenses on his 1980 joint Federal income tax return in the amount of $23,086 with respect to his interest in Worcester Partners. Petitioner's total deduction for 1980, therefore, with respect to his limited partnership interest in Worcester Partners was $137,079 ($113,993 plus $23,086 equals $137,079).
In notices of deficiency, respondent disallowed the $111,345 and the $137,079 in loss deductions claimed by petitioner in 1979 and 1980, in relation to petitioner's interest in Worcester Partners. Other adjustments made by respondent have been settled by the parties.