Mahoney v. C.I.R.
| Decision Date | 14 January 1987 |
| Docket Number | No. 86-1131,86-1131 |
| Citation | 808 F.2d 1219 |
| Parties | -443, 87-1 USTC P 9129 Stephen A. MAHONEY, III, and Mary Ann Mahoney, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Fred T. Goldberg, Chief Counsel, Internal Revenue Service, Washington, D.C., W. Jere Blackshere, Asst. Dist. Counsel, Dallas, Tex., Michael L. Paup, Dept. of Justice, Tax Div., Washington, D.C., Roger M. Olsen, Richard Farber, Kenneth L. Greene (argued), for respondent-appellee.
Edward G. Lavery (argued), Hercules and Lavery, Dallas, Tex., Larry K. Hercules, for petitioners-appellants.
Before WELLFORD and GUY, Circuit Judges; and PECK, Senior Circuit Judge.
This is a complicated case involving gold and platinum straddles on the London market. Although we are dealing with only one appellant, the case was actually a consolidated trial at the Tax Court level, involving several different persons similarly situated.
The issue in the case is the deductibility of the tax losses sustained by all the taxpayers who entered into these straddles. Such transactions, in order to be deductible under the Internal Revenue Code, have to have been transactions "entered into for profit." 1 Although the Code phrase is a term of art that has not been interpreted the same by all courts, it is clear that the transaction cannot be a complete sham. If it is a sham, then such niceties as whether it was "primarily" for profit, or whether the test is an objective or subjective one are simply not involved. Regardless of the definition, the transaction must be bona fide.
Here, the Tax Court in a lengthy and well-reasoned opinion decided the transactions were a sham, thus making it unnecessary to directly reach the "entered for profit issue." The Tax Court looked to the whole scenario and concluded that the taxpayers had really just paid a fee to buy fictitiously generated tax losses which were not only tailored to how much loss they needed to offset income, but also were tailored to whether they needed offsets for ordinary income or capital gains.
Although there are a whole host of specific incidents and other indicia pointing to a sham, the most damaging evidence is really the overview of the entire course of dealings. On the London end there is a conspicuous lack of concern over such things as posting or adequacy of margins, the lack of margin calls, the starting of trading in an account without formal authorization, and the proper separation of accounts. There are also a conspicuous lack of records and a plethora of poorly kept records which cannot be sorted out.
On the American end there was no concern shown for risk, no attention paid to margin, no concern for account balances, and no concern for allegedly grievous errors in London account keeping. There was also complete discretion accorded to London which, although not illegal or even uncommon, is nonetheless curious here when one considers the risk of commodities trading...
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