MEMORANDUM OPINION
This case is before the Court on respondent's Motion for Judgment on the Pleadings. The basic facts relevant to respondent's motion are not in dispute and may be summarized as follows.
For the taxable year 1980, petitioner reported taxable income in the amount of $ 1,495,645 determined after claiming an ordinary loss on securities transactions in the amount of $ 2,416,891. In his notice of deficiency, respondent determined that the loss claimed on petitioner's tax returns was not allowable. Respondent also determined that there were due from petitioner additions to tax under section 6653(a) and increased interest under
With 1991 Tax Ct. Memo LEXIS 128">*129 regard to the disallowance of the Financial Securities loss (hereinafter referred to as the FSC loss) in 1980, the notice of deficiency stated:
I The losses claimed by you in 1980 form [sic] alleged forward contracts involving government securities cannot be recognized since such alleged contracts were illusory and void and in any event such alleged transaction [sic] were shams entered into for tax avoidance purposes. The [FSC] losses claimed by you * * * cannot be recognized, as you have not established that such losses occurred or occurred in the manner claimed. Moreover, it is determined that these transactions lacked economic substance. II Also the allowance of the losses in the year claimed distorts your income (see section 446(b)). In addition, you have not established that such losses were bona fide, or that the transactions were entered into for profit within the meaning of section 165, but on the contrary it would appear that they were entered into solely or primarily to reduce income taxes by converting short term capital gain or ordinary income to long term capital gain income and defer reporting the same. III Additionally, the claimed losses are disallowed1991 Tax Ct. Memo LEXIS 128">*130 because: (1) Such losses arose from the sale or disposition of securities and substantially identical securities[that] were acquired close enough in time to the sale or disposition so that (2) Such losses cannot be allowed because it has not been established that you are at risk within the meaning of section 465 in the amount of the claimed losses. IV In the alternative, if it is determined that any portion of the claimed losses * * * is bona fide and otherwise allowable, such losses are capital in character.
At the time the petition was filed, petitioner was a resident of Arkansas. In his petition, petitioner essentially denied each alternative ground stated in respondent's notice. On January 25, 1990, petitioner, however, filed an amended petition that stated: Petitioner concedes the adjustments in 1980 from forward contracts involving government securities through * * * [FSC] based on Respondent's position that "[t]he allowance of the losses in the year claimed distorts your income (see section 446(b))." Petitioner concedes the [FSC] adjustments in 1980 * * * based upon the Respondent's position that "such losses1991 Tax Ct. Memo LEXIS 128">*131 arose from the sale or disposition of securities and substantially identical securities [that] were acquired close enough in time to the sale or disposition so that * * * Petitioner concedes the [FSC] adjustments in 1980 * * * based upon Respondent's position that Petitioner has not provided adequate records to substantiate the claimed losses.
In his answer to the amended petition, respondent admitted that the FSC losses distorted petitioner's income, that (1) involve straddle transactions as defined by * * * * * * [And,] that the documents and records provided to the respondent by the petitioners [sic] establish that the petitioners [sic] are not entitled 1991 Tax Ct. Memo LEXIS 128">*132 to losses claimed in 1980 relating to * * * [FSC], and such documents and records also establish that such forward contracts involve straddle transactions as defined by
Respondent contends first that judgment on the pleadings with respect to the underlying FSC transaction is appropriate. Petitioner does not object.
The second issue raised concerns respondent's contention that judgment on the pleadings is appropriate on the issue whether petitioner is liable for increased interest under the provisions of (1) 1991 Tax Ct. Memo LEXIS 128">*133 In General. -- In the case of interest payable under (2) Substantial Underpayment Attributable to Tax Motivated Transactions. -- For purposes of this subsection, the term "substantial underpayment attributable to tax motivated transactions" means any underpayment of taxes imposed by subtitle A for any taxable year which is attributable to 1 or more tax motivated transactions if the amount of the underpayment for such year so attributable exceeds $ 1,000. (3) Tax Motivated Transactions. -- (A) In General. -- For purposes of this subsection, 1991 Tax Ct. Memo LEXIS 128">*134 the term "tax motivated transaction" means -- * * * (iv) any use of an accounting method specified in regulations prescribed by the Secretary as a use which may result in a substantial distortion of income * * *. * * * (B) Regulatory Authority. -- The Secretary may by regulations specify other types of transactions which will be treated as tax motivated for purposes of this subsection * * *. In prescribing regulations under the preceding sentence, the Secretary shall take into account - (i) the ratio of the tax benefits to cash invested, (ii) the methods of promoting the use of this type of transaction, and (iii) other relevant considerations.
Respondent contends that since petitioner has conceded in his amended answer that the deductions claimed with respect to the FSC transaction distorted his income and the underpayment resulting therefrom exceeded $ 1,000, all of the requirements of
The
In
We also held that the proper formula for determining the amount of underpayment due to the valuation overstatement was to compare the "actual tax liability (i.e., the tax liability that results from a proper valuation and
The Fifth Circuit affirmed. In discussing the formula the Fifth Circuit noted (
The next development was
The Court of Appeals for the Second Circuit reversed. The court did not reject the Tax Court here found that Irom's investment did not meet the requirements for advanced royalty payments because his financing was non-recourse. The finding of a deficiency on the royalty grounds thus appears to have been inseparable from a finding that the taxpayer was not "at risk" in the transaction.
The case was remanded to determine "whether additional interest was warranted on the grounds asserted by the Commissioner."
In
Prior to trial, the taxpayer conceded that he was not entitled to the investment credit on the ground that the underlying agreement was not a lease. The case, however, went to trial concerning the deductions claimed. The Court found that "petitioner's transaction * * * lack[ed] economic substance or business purpose [and] is a sham transaction under Taxpayers should be cautioned, however, that a different situation exists where a valuation overstatement or other category of tax-motivated transaction is an integral part of or is inseparable from the ground found for disallowance of an item. * * * the Court of Appeals for the Second Circuit [in the
Prior to discussing petitioner's arguments, we point out that petitioner resided in Arkansas and the venue for an appeal, if any, would lie in the Court of Appeals for the Eighth Circuit. We are, therefore, not constrained to apply the view of any other circuit. See
Petitioner would have us read the Fifth Circuit's opinion in
The question in this case is whether the "grounds for disallowing deductions or investment tax credits are inseparable and at least one such ground is a tax-motivated transaction."
Petitioner also contends that the regulations under Q-3. What accounting methods may result in a substantial distortion of income1991 Tax Ct. Memo LEXIS 128">*144 for any period * * *? A-3. A deduction or credit disallowed, or income included, in any of the circumstances listed below shall be treated as attributable to the use of an accounting method that may result in a substantial distortion of income and shall thus be a tax motivated transaction that results in a tax motivated underpayment: * * * (9) In the case of a taxpayer who computes taxable income using the cash receipts and disbursements method of accounting, any deduction disallowed for any period because * * * (iii) the deduction resulted in a
1. This case was assigned pursuant to section 7443A(b)(4) of the Internal Revenue Code and Rule 180 et seq. All statutory references are to the Internal Revenue Code of 1954, as amended, and as in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise provided.↩
2.
3. It should be noted that petitioner mischaracterizes respondent's position. Respondent has not taken the position that "Petitioner has not provided adequate records to substantiate the claimed losses," as stated in the amended petition. Respondent's positions, as stated in the notice of deficiency, were that "you have not established that such losses occurred or occurred in the manner claimed" and that "you have not established that such losses were bona fide, or that the transactions were entered into for a profit." If petitioner's concession is that the losses were not bona fide and the transactions were not entered into for profit, petitioner concedes that the transactions were shams. See
4. See also