GTC Biotherapeutics (fka GTCB)

[mouton29]

Some may be tiring of this so I will stop soon, but it is almost April 15....

<<Among the panoply of tax rules is one called the "related
persons rule". Just as one may not sell at a loss while one's
spouse simultaneously repurchases the property and thereupon
claim the writeoff sans exposure to authentic risk (substance
always trumps form in the realm of US taxation), so
one may not sell at a loss in a taxable account while buying
the same property back in a qualified tax-deferred domicile.>>

There are two concepts in this. It is true that section 267 of the Code disallows sales between certain related persons, as defined. However, the a beneficiary and IRA are not among the listed relationships. However, the IRS has ruled that the wash sale rule does apply to a sale by a beneficiary and ha purchase by his IRA -- the sale happened a day apart and the reasoning is not based on the old Supreme Court case where a simultaneous sale and purchase by husband and wife on a stock exchange was held to be a sale between the two.

ISSUE

If an individual sells stock or securities for a loss and causes his or her individual retirement account or Roth IRA to purchase substantially identical stock or securities within 30 days before or after the sale, is the loss on the sale of the stock or securities disallowed?

FACTS

A, an individual, owns 100 shares of X Company stock with a basis of $1,000. On December 20, 2007, A sells the 100 shares of X Company stock for $600 (the “Sale”).

On December 21, 2007, A causes an individual retirement account (within the meaning of § 408) or a Roth IRA (within the meaning of § 408A), established for the exclusive benefit of A or A’s beneficiaries, to purchase 100 shares of X Company stock for its then fair market value (the “Purchase”).

A executes the Sale and the Purchase with different, unrelated market participants.

.....

In Security First National Bank of Los Angeles, 28 BTA 289 (1933), the taxpayer sold bonds (at a market price) to a corporation of which the taxpayer was the sole shareholder. On the same day, in exchange for land, the corporation transferred the same bonds at the same price to a trust over which the taxpayer had absolute dominion and control. In finding that § 214(a)(5), the predecessor to § 1091(a), applied to disallow the loss, the court reasoned as follows:

The [taxpayer] did not personally reacquire substantially identical property and, strictly construed, the language of section 214(a)(5), above referred to, might not apply. However, the rule of strict construction should not be unduly pressed to permit easy evasion of a taxing statute. Carbon Steel Co. v. Lewellyn, 251 U.S. 501. Unless the respondent is right, a trust like this one could be used deliberately to accomplish the very thing which Congress intended to frustrate. ... Although title to the bonds was acquired by the trust, actual command over the property was still in the [taxpayer]. ...The difference between acquisition by him personally and acquisition by the trust amounts only to a refinement of title and may be disregarded so far as section 214(a)(5) is concerned.

Security First National Bank, 28 BTA at 314 - 315.

Applying this reasoning to the facts of this ruling, even though an individual retirement account is a tax-exempt trust, A has nevertheless acquired, for purposes of § 1091(a), 100 shares of X Company stock on December 21, 2007, by virtue of the Purchase. See also Shoenberg v. Commissioner, 77 F.2d 446 (8th Cir. 1935).

HOLDING

The loss on the Sale of stock is disallowed under § 1091. A’s basis in the individual retirement account or Roth IRA is not increased by virtue of § 1091(d). This ruling does not address any issues other than those specifically addressed herein. In particular, this ruling does not address (and no inference should be drawn with respect to) any issue arising under § 4975.

The full text of the ruling can be viewed at

http://www.irs.gov/irb/2008-03_IRB/ar08.html

Published rulings are the view of the IRS and while generally binding on the IRS are not always followed by the courts. It is not clear to me what a court would do on these facts, or more taxpayer favorable facts such as, taxpayer sells stock and a day later his wife's IRA buys the stock, or his wife for the matter, purchases.. Unlike the straddle rules, there is no related party rule in the 1091 wash sale rule, and the 267 loss disallowance rule only applies to a sale between the related parties.