Fender v. U.S., 1
| Decision Date | 02 August 1978 |
| Docket Number | No. 1,H,No. 76-3010,1,76-3010 |
| Citation | 577 F.2d 934 |
| Parties | 78-2 USTC P 9617 David M. FENDER, Trustarris R. Fender, Trustee, and Thomas H. Sharp, Trustee, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. Harris R. FENDER, Jr., Trustarris R. Fender, Trustee, and Thomas H. Sharp, Trustee, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Roby Hadden, U. S. Atty., C. Houston Abel, Asst. U. S. Atty., Tyler, Tex., Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews, Act. Chief, Appellate Sect., Leonard J. Henzke, Jr., Atty., Jeffrey S. Blum, Atty., Dept. of Justice, Tax Div., Washington, D. C., for defendant-appellant.
Sander W. Shapiro, Glen M. Wilkerson, Austin, Tex., for plaintiffs-appellees.
Appeal from the United States District Court for the Eastern District of Texas.
Before COLEMAN, AINSWORTH and VANCE, Circuit Judges.
In this tax refund suit the question for decision is the validity of a claimed loss deduction growing out of the sale and repurchase by taxpayer to a bank of a large amount of unrated municipal bonds. Plaintiffs David M. Fender, Trust No. 1, Harris R. Fender, Jr., Trust No. 1, and co-trustees Harris R. Fender and Thomas Sharp, brought this suit 1 seeking a refund of 1969 federal income taxes assessed as a result of the Internal Revenue Service's disallowance of a loss deduction claimed in connection with the sale and repurchase of municipal bonds held by the trust. The district court found for the plaintiffs and ordered a refund of the taxes and penalties plus interest. The Government appeals that decision contending that the sale of bonds resulting in the loss was not a bona fide sale.
Harris R. Fender, an experienced investment banker, established two trusts for his two sons and in 1969 the trusts had large capital gains from the sale of certain Continental Telephone stock. To offset those gains, Harris Fender, co-trustee of the trust, attempted to sell an installment of Bender Road Improvement District WW and SS Combination Tax and Revenue Bonds ("Bender Bonds") owned by the trusts. These bonds, along with the bond market as a whole, had substantially declined in value as a result of a rise in interest rates. The bonds were purchased by the trusts for the amount of $435,017 and had a par value of $445,000. Because the bonds were unrated, they could not be sold in the public bond market. On December 26, 1969, Fender completed an over-the-counter sale of the Bender Bonds to the Longview National Bank & Trust Company, Longview, Texas, for $225,000 (approximately 50% of par value) plus accrued interest. This resulted in a $106,258.35 loss for each of the trusts. At the time of the sale, Fender controlled 40.7% of the Longview National Bank's stock either individually or through the two trusts. Shortly thereafter, on January 15, 1970, the stock interest of Fender and the trusts in the Longview Bank increased to 50.15%. On February 6, 1970, 42 days after their transfer to the bank, the trusts repurchased the bonds from the bank for $224,735 (approximately 50.5% of par value) plus accrued interest. Both transactions were made at the fair market value of the bonds, though the bonds had limited marketability since they were unrated. The Internal Revenue Service disallowed the loss deduction claimed in connection with the transfer of the Bender Bonds and this litigation ensued.
A taxpayer is allowed a deduction for "any loss sustained during the taxable year . . . ." I.R.C. § 165(a). 2 However, not every transaction purporting to result in a loss is deductible. Treas.Reg. § 1.165-1(b). The burden of showing that the loss was bona fide is on the taxpayer. See Rand v. Helvering, 8 Cir., 1935,77 F.2d 450. Further, the district court's conclusion that the transfer of the Bender Bonds to the Longview Bank was a bona fide sale is a conclusion of law which this Court may fully review. See, e. g., Biedenharn Realty Co., Inc. v. United States, 5 Cir., 1976, 526 F.2d 409, 416 n.25 (en banc), cert. denied, 429 U.S. 819, 97 S.Ct. 64, 50 L.Ed.2d 79 (1976); Casner v. Commissioner of Internal Revenue, 5 Cir., 1971, 450 F.2d 379, 387; Waterman Steamship Corp. v. Commissioner of Internal Revenue, 5 Cir., 1970, 430 F.2d 1185, 1192; American National Bank of Austin v. United States, 5 Cir., 1970,421 F.2d 442, 451.
In deciding to sell the Bender Bonds, the taxpayers were motivated by the possibility of tax avoidance. Standing alone such a motive is an insufficient basis for disallowing a deduction.
The legal right of a taxpayer to decrease the amount of what would otherwise be his taxes, or to altogether avoid them, by means which the law permits, cannot be doubted. . . . But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended.
Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 267, 79 L.Ed. 596 (1935). The circumstances of this case establish that the taxpayers did not in substance experience the loss that is necessary for a deduction under section 165, and that the sole purpose of the transaction was to create a tax loss in the year 1969.
Apart from the tax motive, there was no apparent reason for the taxpayers to sell the Bender Bonds. While increased interest rates had caused the market value of the bonds to decline, the issuer of the Bender Bonds remained financially sound and capable of continuing to pay current interest and the full par value of the bonds at maturity. Hence, a bondholder would experience no loss if the bonds were held to maturity. Although the trusts appeared to sustain a significant loss by transferring the bonds to the bank during a depressed bond market, the ability to repurchase these bonds meant that the trusts would eventually be paid their original investment in the bonds and would suffer no real loss from the sale.
Hence, in determining whether the taxpayers suffered a genuine loss in the alleged sale to the bank, we examine the circumstances to see whether the taxpayers were exposed to a real risk of not being able to repurchase the bonds in a short period of time and thus of not being able to recover the apparent loss from the December 26 sale to the bank. This, in turn, depends on whether the taxpayers were able effectively to control the Longview Bank sufficiently to assure a resale of the bonds to the trusts. In support of the loss deduction, Fender claims that there was no agreement for the trusts to repurchase the bonds from the bank. 3 Further, Fender...
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