The IRS concluded in a technical advice memorandum (TAM 201737011), released on Sept. 15, 2017, that transfers of stock did not result in losses recognized by the respective taxpayers.
In the TAM, an individual, A, was the majority shareholder of an S corporation that was a self-clearing broker-dealer. Shareholder A also held a partnership interest in a hedge fund which was a related party to A under Section 707.
The broker had a proprietary trading account in which it conducted investment activities. The broker held legal title to the trading account, but A had exclusive discretion, voting power and control over the investments in the trading account. Shareholder A and the broker had a compensation agreement which provided that A received all gains from securities in the trading account, including any dividends, reduced by losses from securities in the trading account.
Shareholder A also served as the portfolio manager of the hedge fund. The stock portfolio of the hedge fund was held in custody at the broker.
Shareholder A and the hedge fund each transferred shares of publicly traded stock to the trading account in order to realize tax losses on such stock. The transactions were executed at the prevailing market prices at or between the bid price and ask price.
The IRS concluded that there was not a sale to the extent that A transferred shares to the trading account because A retained the benefits and burdens of ownership. Shareholder A controlled the voting decisions and had sole discretion whether to dispose of the stock in the trading account even though title belonged to the broker. In addition, A retained the economic risks and rewards attributed to the stock from the compensation agreement between A and the broker.
The IRS also concluded that there was a sale to the extent that the hedge fund transferred shares to the trading account because: (i) the securities held by hedge fund were not owned by A; and (ii) the hedge fund did not retain the benefits and burdens of the ownership of the shares. However, the IRS concluded that Section 707(b) disallowed the losses incurred by the hedge fund because A was a related party.
Partner, Washington National Tax Office
+1 202 521 1532
Partner, Washington National Tax Office
+1 202 521 1502
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.