When I was starting out as a tax lawyer many years ago, I was greatly impressed by Walter Cliff and Philip Levine’s 1985 article entitled, Reflections on Ownership: Sales and Pledges of Installment Obligations. A late 1980s visit to Walter Cliff’s office, replete with a giant James Audubon print of a bird of prey on the wall behind the desk, only reinforced my impression that the author was a true legal eagle. In Reflections, these esteemed practitioners offered an insightful understanding of the factors taken into account in determining when someone who borrowed against installment obligations could be considered to have made a taxable disposition of the pledged indebtedness. Although the context for their observations has greatly diminished in importance over the years, the principles that they derived in their analysis have only grown in precedential value. Indeed, Calloway v. Commissioner and Anschutz Co. v. Commissioner, Tax Court cases both filed in July 2010, rely heavily, if not exclusively, on the principles first revealed to me by Messrs. Cliff and Levine. Unfortunately, using these principles to determine the ownership of fungible, publicly traded equities is the legal equivalent of forcing the proverbial square peg into a round hole.
Calloway involved a so-called “90% stock loan” incurred by the taxpayer from Derivium Capital, LLC (Derivium). By the time the Tax Court decided this case, two state court decisions involving Derivium transactions had come out against taxpayers, Derivium itself was in bankruptcy as a result of not honoring the terms of the loans, and the Service had initiated tax shelter promoter investigations against the principals. Against this less than auspicious background, the Tax Court in Calloway held for the government. Anschutz, on the other hand, involved a long-dated variable prepaid forward contract (VPFC) designed by a prominent investment bank, and tested the Service’s position as set forth in Technical Advice Memorandum 2006-04-033 and Advice Memorandum 2007-004. Unfortunately for the taxpayer, the Service’s position withstood his arguments to the contrary—but happily, the tax bite was not as deep as expected.