698 Fed.Appx. 720 (3rd Cir. 2017), 16-1674, Tseytin v. Commissioner of Internal Revenue

Docket Nº:16-1674
Citation:698 Fed.Appx. 720
Opinion Judge:VANASKIE, Circuit Judge.
Party Name:Michael TSEYTIN; Ella Tseytin, Appellants v. COMMISSIONER OF INTERNAL REVENUE
Attorney:Frank Agostino, Esq., Lawrence A. Sannicandro, Jr., Esq. [ARGUED], Agostino & Associates, Counsel for Appellants David A. Hubbert, Acting Assistant Attorney General, Regina S. Moriarty, Esq. [ARGUED], Bridget M. Rowan, Esq., United States Department of Justice, Counsel for Appellee
Judge Panel:Before: VANASKIE, KRAUSE, and RESTREPO, Circuit Judges
Case Date:August 18, 2017
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit

Page 720

698 Fed.Appx. 720 (3rd Cir. 2017)

Michael TSEYTIN; Ella Tseytin, Appellants



No. 16-1674

United States Court of Appeals, Third Circuit

August 18, 2017

Argued March 30, 2017


Editorial Note:

This opinion is not regarded as Precedents which bind the court under Third Circuit Internal Operating Procedure Rule 5.7. (See Federal Rule of Appellate Procedure Rule 32.1)

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On Petition for Review of Order of the United States Tax Court, (T.C. No. 354-12) Tax Court Judge: Hon. Stephen J. Swift

Frank Agostino, Esq., Lawrence A. Sannicandro, Jr., Esq. [ARGUED], Agostino & Associates, Counsel for Appellants

David A. Hubbert, Acting Assistant Attorney General, Regina S. Moriarty, Esq. [ARGUED], Bridget M. Rowan, Esq., United States Department of Justice, Counsel for Appellee

Before: VANASKIE, KRAUSE, and RESTREPO, Circuit Judges


VANASKIE, Circuit Judge.

This tax appeal raises the classic tax issue of form versus substance. Appellant Michael Tseytin was the primary shareholder in a company that owned most of Russia’s Pizza Huts and KFCs. To sell the company, he bought out his minority shareholder and then transferred all the company’s shares— including what he just purchased— to the buyer, an Eastern and Central European fast-food peer. In effect, the deal meant Tseytin sold his majority stake and also acted as the go-between in the minority shareholder’s sale of its shares. But the IRS took the formalities of the deal literally, and taxed Tseytin on the gain attributable to all the shares, even the gain on the shares purchased from the minority shareholder.

Tseytin now argues he should not be taxed on stock he bought from the minority shareholder because he never owned it and acted merely as an agent, and alternatively, if he must be taxed, he should be permitted to recognize losses. We find neither argument meritorious because Tseytin must bear the tax consequences of his business decisions, and Tseytin’s two blocks of stock must be analyzed as separate units to give content to I.R.C. § 356. A limited remand, however, is warranted, because the parties agree that Appellant Ella Tseytin— Michael’s wife— was held liable for her husband’s tax bill in error. We will remand so that the error with respect to Ella may be corrected, but otherwise affirm.


This case centers on a two-company merger. The first company was Appellant Michael Tseytin’s New Jersey corporation, U.S. Strategies, Inc. (" USSI" ), whose business involved owning and operating two Russian LLCs that in turn owned and operated most of Russia’s KFC and Pizza Hut restaurants. Tseytin owned 75% of USSI’s shares. The remaining 25% were

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owned by a company named Archer Consulting Corporation.

On the other side of the merger was AmRest Holdings, NV, a Netherlands corporation also involved in the fast-food business. It owned KFCs, Pizza Huts, and other fast-food restaurants in Eastern Europe, Central Europe, Germany, France, and Spain.

In May 2007, all the relevant players substantively agreed to the merger in two separate written agreements. The first agreement was between Tseytin and Archer, wherein Tseytin agreed to " purchase" for his " own account" Archer’s 25% stake in USSI. (App. 123, 125.) At closing on June 14 at Archer’s offices in Moscow, Archer was to transfer the shares to Tseytin, and then at some time in the next month Tseytin would make a " deferred" purchase payment to Archer, prior to July 31st. (App. 123.)

The second agreement, the Merger Agreement, was signed by Tseytin, USSI, and AmRest— but not Archer— and stated that at closing in Warsaw (1) Tseytin would ensure that he was the " record" owner of 100% of the USSI stock, " free and clear of any restrictions" ; (2) Tseytin would transfer 100% of USSI’s shares to AmRest; and (3) AmRest would transfer cash and AmRest stock to Tseytin as compensation. (App. 152.)

The transaction went through as planned. On June 14, Tseytin and Archer closed on their agreement and Archer transferred its USSI stock to Tseytin. On July 2, the USSI-AmRest merger closed, and Tseytin transferred all the USSI stock to AmRest. On July 3, AmRest sent Tseytin $23,099,420 in cash and $30,791,390 in AmRest stock, for a total of nearly $54 million for all USSI shares. Then on July 5, Tseytin paid Archer $14 million for its 25% stake in USSI.

In two tax filings for the 2007 tax year, Tseytin took two different approaches to the transaction. In his original return, Tseytin reported tax liability of $3,780,522 and paid that amount to the IRS. But in 2009 he amended his return and reported a lower amount of liability, $2,577,182, and requested a refund for the difference. The Commissioner audited Tseytin and found the original amount to be closer to correct. The Commissioner denied Tseytin’s request for a refund and ordered Tseytin to pay $30,478 in back taxes and a $6,096 penalty. Tseytin then petitioned the Tax Court for a redetermination. The Tax Court held for the Commissioner, and Tseytin timely appealed.


The Tax Court had jurisdiction pursuant to 26 U.S.C. (" I.R.C." ) § 6213 and § 7442. We have jurisdiction to review decisions of the Tax Court under I.R.C. § 7482(a)(1). We review the Tax Court’s legal conclusions de novo and its factual findings for clear error. Crispin v. Comm’r, 708 F.3d 507, 514 (3d Cir. 2013).


Tseytin raises two main issues as to his tax liability: (1) whether he owes tax for income he allegedly derived from Archer’s shares, and (2) whether his " losses" can be subtracted from his overall gains.


First, Tseytin challenges...

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