SCOTUS Reports

Tag: When Issued Securities

  • Stavisky v. Commissioner, 27 T.C. 147 (1956): Treatment of Payments for Assignment of “When Issued” Securities Contracts

    Stavisky v. Commissioner, 27 T.C. 147 (1956)

    Payments made to assign a “when issued” securities contract are treated as sales or exchanges of capital assets, determining whether resulting losses are capital or ordinary losses.

    Summary

    The Tax Court addressed whether a payment made by a taxpayer to transfer a portion of a “when issued” stock sale contract resulted in a capital loss or an ordinary loss. The taxpayer entered contracts to buy and sell “when issued” Missouri Pacific Railroad preferred stock. Due to rising prices, he paid a third party to assume part of his selling contract. The court determined that this was a sale or exchange of a capital asset, resulting in a long-term capital loss because the initial contract was entered into before the effective date of the applicable tax code provision. The court rejected the taxpayer’s argument that the payment was merely a release from an obligation, emphasizing the bilateral nature of the contract and the transfer of rights and liabilities.

    Facts

    Meyer J. Stavisky contracted to sell 10,000 shares of “when issued” Missouri Pacific Railroad preferred stock. The following day, he contracted to buy 10,000 shares of the same stock. Due to rising prices, Stavisky was required to deposit substantial cash to meet “mark to market” requirements. In December 1951, he transferred 40% of his selling contract to Sutro Bros. & Co., paying $31,150. In January 1952, he transferred 40% of his purchase contract to Ira Haupt & Co., receiving $29,975. The reorganization plan for Missouri Pacific Railroad failed in December 1954, and the “when issued” contracts were canceled.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in the taxpayer’s 1951 income tax return, disallowing the deduction claimed for the payment to Sutro as an ordinary loss. The Tax Court reviewed the Commissioner’s determination.

    Issue(s)

    1. Whether the payment made by the taxpayer to Sutro for the transfer of a portion of the sales contract constituted a sale or exchange of a capital asset.

    2. If the transaction was a sale or exchange, whether the resulting loss was a long-term or short-term capital loss.

    Holding

    1. Yes, because the transfer of the contract rights and liabilities constituted a sale or exchange of a capital asset.

    2. Yes, because the initial contract was entered into before the effective date of the relevant provision of the Internal Revenue Code, therefore the loss was long-term.

    Court’s Reasoning

    The court rejected the argument that the payment was merely a release from an obligation, emphasizing the bilateral nature of the “when issued” contracts. The court pointed out that the taxpayer possessed both rights and obligations under the contract. The court held that the transfer of a portion of the contract’s rights and liabilities to a third party constituted a sale or exchange. The court cited I.T. 3721, a Revenue Ruling holding that transfers of rights under “when issued” contracts constitute sales or exchanges of capital assets. The court distinguished the taxpayer’s situation from a simple release from liability and applied the principle that the taxpayer had sold a portion of their contract rights. The court then analyzed the length of time the asset was held. The court found the relevant date to determine long-term versus short-term treatment was the date the initial contract was made. Since the contract was made before the 1950 Revenue Act, the loss was treated as a long-term capital loss.

    Practical Implications

    This case clarifies that payments made for the assignment of “when issued” contracts are treated as sales or exchanges. This impacts the tax treatment of such transactions. Lawyers advising clients who engage in these types of securities transactions must understand the implications of Section 117 of the Internal Revenue Code and related regulations. This means carefully analyzing when the original contract was made, and whether the transfer meets the criteria of a sale or exchange. The court’s focus on the bilateral nature of contracts has implications for similar financial instruments. Later cases dealing with assignments or sales of contractual rights would likely cite this case. Business planners and tax advisors need to understand the timing of entering into contracts and the potential tax ramifications of assignments or transfers.

  • Shanis v. Commissioner, 19 T.C. 641 (1953): Tax Treatment of ‘When Issued’ Securities Contracts

    19 T.C. 641 (1953)

    When ‘buy’ and ‘sell’ contracts for ‘when issued’ securities are settled through a stock clearing corporation on the settlement date, the transaction is treated as a sale and exchange of the underlying securities, resulting in a short-term capital transaction, rather than a sale of the contract rights themselves.

    Summary

    The Shanis partnership entered into ‘buy’ and ‘sell’ contracts for new securities of the St. Louis-San Francisco Railway Company on a ‘when, as, and if issued’ basis. The Tax Court addressed whether the settlement of these contracts through the Stock Clearing Corporation resulted in a long-term capital gain and a short-term capital loss (as argued by the petitioners) or a net short-term capital gain (as determined by the Commissioner). The court held that the transactions constituted a sale and exchange of the underlying securities on the settlement date, resulting in a short-term capital gain, following the IRS’s established position in I.T. 3721.

    Facts

    The Shanis partnership entered into 51 contracts to sell new St. Louis-San Francisco Railway Company securities on a ‘when, as, and if issued’ basis around May 1, 1945. On September 20, 1946, the partnership entered into 9 contracts to buy the same type and quantity of securities. The National Association of Securities Dealers announced on January 1, 1947, that these securities would be recognized and issued on January 24, 1947. On the issuance date, all contracts were settled through the Stock Clearing Corporation.

    Procedural History

    The Commissioner determined that the settlement of the ‘when issued’ contracts resulted in a net short-term capital gain. The Shanis partnership petitioned the Tax Court, arguing for long-term capital gain treatment on the ‘sell’ contracts and short-term capital loss treatment on the ‘buy’ contracts. The Tax Court reviewed the Commissioner’s determination.

    Issue(s)

    Whether the settlement of ‘buy’ and ‘sell’ contracts for ‘when issued’ securities through the Stock Clearing Corporation constitutes a sale and exchange of the underlying securities, resulting in a short-term capital transaction, or a sale of the contract rights themselves, potentially resulting in long-term capital gain treatment for the ‘sell’ contracts.

    Holding

    No, because when ‘buy’ and ‘sell’ contracts of ‘when issued’ securities are retained until the settlement date and cleared through the Stock Clearing Corporation, there is a sale and exchange of the securities involved on the settlement date, resulting in a short-term capital transaction.

    Court’s Reasoning

    The court acknowledged that ‘buy’ and ‘sell’ contracts for ‘when issued’ securities are capital assets, and that contract rights can be assigned, leading to long or short-term capital transactions depending on the holding period. However, in this case, the court found that the partnership did not sell or exchange the contract rights prior to maturity. Instead, the contracts were retained until the settlement date and cleared through the Stock Clearing Corporation. The court followed the IRS’s position in I.T. 3721, which treats such transactions as a sale and exchange of the underlying securities on the settlement date. The court cited Raymond B. Haynes, 17 T.C. 772, with approval, noting that no actual sale or purchase is effected under a ‘when issued’ contract until the new securities are issued, and the holding period begins on the settlement date. The court quoted I.T. 3721, stating that the transactions “in effect, have been completed through the New York Stock Exchange, and no further acquisition or disposition of the new stock will be made under the contracts.”

    Practical Implications

    This case clarifies the tax treatment of gains and losses arising from ‘when issued’ securities transactions. It reinforces the IRS’s position that settlement of offsetting ‘buy’ and ‘sell’ contracts through a clearing corporation constitutes a sale of the underlying securities, not a sale of the contract rights themselves. This determination is crucial for taxpayers and legal professionals involved in securities trading, particularly when dealing with complex financial instruments like ‘when issued’ securities. It emphasizes the importance of understanding the mechanics of stock clearing corporations and the timing of acquisition and disposition for capital gains purposes. Later cases and IRS guidance continue to refine the application of these principles in various financial contexts.