Greene v. U.S.
| Decision Date | 06 January 1994 |
| Docket Number | No. 91,D,91 |
| Citation | 13 F.3d 577 |
| Parties | -746, 94-1 USTC P 50,022 Leonard GREENE and Joyce Greene, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. ocket 93-6016. |
| Court | U.S. Court of Appeals — Second Circuit |
Robert Sadowski, Asst. U.S. Atty. for the Southern District of New York (Gabriel W. Gorenstein, Asst. U.S. Atty., Roger S. Hayes, U.S. Atty. for the Southern District of New York, of counsel), for defendant-appellant.
Sheldon H. Elsen, New York City (Melissa A. Cohen, Orans, Elsen & Lupert, New York City, Richard A. Sporn, Gerald & Lawrence Blumberg, New York City, of counsel), for plaintiffs-appellees.
Before: FEINBERG, CARDAMONE, and ALTIMARI, Circuit Judges.
This appeal concerns the tax consequences arising from taxpayers' charitable donation of futures contracts while retaining the right to a portion of the income from the subsequent sale of the contracts by the charity. Its resolution requires us to revisit a line of cases beginning with Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731 (1930), and relied upon in Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940), to determine whether the district court properly treated the taxpayers' donation as a gift of "the tree," with a retained right to some of "the fruit," rather than, as the government believes, a gift of some of the fruit, with taxpayers maintaining possession of the tree.
In asserting this view of the transaction the government takes the actual facts as found by the district court and insists that we take the record not on those facts, but on its proposed fictitious, hypothetical facts. Were we to examine the taxpayers' charitable plans as the government wants us to, the taxpayers' gifts to charity would result in taxable income. The government's point comes down to this: if the facts were different than they are, the government might succeed on this appeal. But since the facts are what they are, we affirm.
Leonard and Joyce Greene, husband and wife, founded the Institute for Socioeconomic Studies, Inc. (Institute), a tax-exempt private foundation, in the early 1970s. Leonard Greene served as its president and as a member of its board of directors. In 1974 the Greenes requested a letter ruling from the Internal Revenue Service (IRS) with respect to the tax consequences of their proposed plan to contribute futures contracts to the Institute. The IRS advised them that if they transferred all their equitable rights and interests in the contracts to the Institute, executed an irrevocable power of attorney granting the Institute power to determine when and if the contracts were to be sold, and provided that all proceeds of the sale of the contracts would be paid by the commodity exchange directly to the Institute, they would be entitled to a charitable deduction on their joint tax return in the amount of the fair market value of the contracts, and would not be charged with realizing a gain or loss on the sale. Under the plan approved by the IRS the taxpayers were allowed to retain legal title to the contracts because the New York Commodity Exchange would not recognize, except on the floor of the Exchange, the transfer of futures contracts to third parties. Between 1974 and 1980 the Greenes made donations, following the terms of the private letter ruling, and reported on their tax returns charitable contributions equal to the fair market value of the contracts at the time when they were donated.
In 1981 Congress amended Sec. 1256 of the Internal Revenue Code (Code) to combat perceived tax abuses by commodities traders who structured their trading to defer recognition of income to future years or to convert the character of the income realized from short-term income to long-term capital gain. The amendments required that all commodities futures contracts acquired and positions established after June 23, 1981 be marked to market at year-end and the gains or losses, regardless of how long the contracts had been held, be characterized as 60 percent long-term and 40 percent short-term capital gains or losses. See 26 U.S.C. Sec. 1256(a) (1988). Section 170 of the Code does not permit a charitable donation deduction for the value of donated property that would have been a short-term gain to the taxpayer had the taxpayer sold the property. See 26 U.S.C. Sec. 170(e)(1) (1988).
The effect of Sec. 1256 and Sec. 170 on the Greenes was that were they to continue donating their entire interest in futures contracts to the Institute, they would only be entitled to claim a charitable deduction for 60 percent of the contracts' fair market value--the amount equal to the long-term gain portion. In light of this, the taxpayers changed the manner in which they made their contributions. Rather than conveying "all of his right, title and interest in" the futures contracts he wished to donate, as in previous years, Leonard Greene only conveyed "all of his right, title and interest in the long term capital gain of the futures contracts" to the Institute, specifically retaining for himself Leonard Greene--who principally participated in the transactions at issue though he and his wife filed a joint income tax return for the year 1982 and are both parties to this litigation--chose the selected futures contracts according to the unrealized gains in them as well as the funding needs of the Institute. The contracts were then transferred to a special account held with the brokerage firm of Merrill Lynch Pierce Fenner & Smith (Merrill Lynch) over which Greene had given power of attorney to the trustee of the Institute. The donated contracts were sold the same day or shortly after each gift was made, as there was a standing instruction from the Institute's trustee to Merrill Lynch to sell immediately any futures contracts donated by Greene. That part of the proceeds representing the long-term capital gains was transferred to the Institute's account, and the part representing the short-term capital gains was transferred to Greene's personal account. The Greenes reported and paid income taxes on the short-term capital gains and took a deduction for their charitable donation of the long-term capital gains to the extent allowed under the Code.
the short-term capital gain. The other provisions of the 1982 donation agreement remained substantially the same as in the previous years' agreements, delivering an irrevocable power of attorney for the contracts to the Institute's trustee, giving the trustee absolute and complete discretion to determine when and if to sell the contracts, and stating that as a result of the agreement, he would no longer have any "control" (prior agreements used the word "interest") in the contracts.
In September 1990 the IRS sent the taxpayers a notice of deficiency for the tax year 1982. It had determined that the full fair market value of the contracts should be included in their 1982 taxable income. It also disallowed the Greenes' deductions for the years 1983 through 1987 claimed as carryforwards for the excess over the maximum charitable deduction allowed in 1982. Appellees paid the deficiency and filed a claim for a refund with the IRS. It was disallowed. In May 1991 taxpayers filed the instant suit for a refund in the United States District Court for the Southern District of New York (Goettel, J.). Both sides moved for summary judgment. The district court granted the Greenes' motion and ordered the requested refund on November 25, 1992.
On appeal, the government contends the wrong legal standard for determining whether the donation was an anticipatory assignment of income was applied. It also maintains it was error for the trial court not to apply the step transaction doctrine to the subject donation. In addition, the government urges--for the first time on appeal--that Sec. 1256(c) of the Code provides an independent ground for reversal because that section requires taxpayers to report the entire amount of gain in a commodity futures contract whenever such is transferred, including those that are donated to a charity. In the discussion that follows, we address each of these issues.
A grant of summary judgment is reviewed de novo on appeal to determine if there are genuine issues of material fact. See Bryant v. Maffucci, 923 F.2d 979, 982 (2d Cir.), cert. denied, --- U.S. ----, 112 S.Ct. 152, 116 L.Ed.2d 117 (1991). Summary judgment is appropriate when no such issue is found and when, based upon facts not in dispute, the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56(c). The government does not contend that there is a genuine issue of material fact requiring trial; it can hardly do so considering it too moved for summary judgment. The issue is whether Judge Goettel correctly applied the controlling law to the facts of this case. We think he did.
When a charitable donation is property other than money, the amount of the contribution is the fair market value of the property at the time of the donation. See 26 C.F.R. Sec. 1.170A-1(c)(1) (1993). Futures contracts are property for income tax purposes. See, e.g., S.C. Johnson & Son, Inc. v. Commissioner, 63 T.C. 778, 784, 1975 WL 3062 (1975). A charitable gift of property appreciated with a capital gain may be claimed as a deduction in an amount equal to the property's The government insists that under either the anticipatory assignment of income doctrine or step transaction doctrine, the Greenes' 1982 donation should be treated as a sale of the futures contracts followed by a gift to charity of the long-term gain proceeds of the sale. Our discussion turns to an analysis of these two doctrines.
fair market value, subject to a limit of 30 percent of the taxpayer's adjusted gross income. 26 U.S.C. Secs. 170(b)(1)(C)(i), 170(b)(1)(F) (1988). No taxable gain is recognized by the donor when the entire interest in the...
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