James E. Sochin v. Commissioner of Internal Revenue, Dennis S. Brown v. Commissioner of Internal Revenue

James Sochin and Dennis Brown (“Taxpayers”) appeal from the tax court’s deficiency determinations. The court disallowed the losses and expenses deducted by Taxpayers with respect to investments in straddle transactions involving forward contracts. The court held that the transactions were “factual shams.” Brown v. Commissioner, 85 T.C. 968, 998-1000 (1985). On appeal, Taxpayers allege that the tax court: 1) failed to apply the proper legal standard for determining what a sham is; 2) failed to make adequate factual findings as required by 26 U.S.C. § 7459 (b); 3) improperly considered evidence of other investors involved in the same investment program; and 4) based its sham determination on clearly erroneous factual findings. We affirm.

FACTUAL BACKGROUND

Taxpayers claimed losses from investments in straddles 1 in forward contracts 2 to buy and sell certificates issued by the Government National Mortgage Association (“Ginnie Maes”) and the Federal Home Loan Mortgage Corporation (“Freddie Macs”). The investments were part of an investment program promoted by Gregory Government Securities, Inc. (“GGS”) and Gregory Investment & Management, Inc. (“GIM”). William Gregory incorporated…

concurring:

I cannot reconcile Bail Bonds By Marvin Nelson, Inc. v. Commissioner, 820 F.2d 1543 (9th Cir.1987) with our prior precedent. There, we applied the two-prong disjunctive test adopted by the Fourth Circuit in Rice’s Toyota World, Inc. v. Commissioner, 752 F.2d 89 (4th Cir.1985). Unlike the genuine recourse indebtedness in Rice’s, however, the transaction in Bail Bonds existed only on paper.

I believe that a transaction which is in substance only “financial gymnastics,” purely artificial, or a “paper chase” does not require any inquiry into the profit motive. Enrici v. Commissioner, 813 F.2d 293 , 295 n. 1 (9th Cir.1987); Mahoney v. Commissioner, 808 F.2d 1219, 1220 (6th Cir.1987); see Goldberg v. United States, 789 F.2d 1341 (9th Cir.1986) (affirming sham determination focusing entirely on economic substance); Neely v. United States, 775 F.2d 1092 (9th Cir.1985) (invalidating putative tax consequences of sham trust on grounds that it had “no economic effect other than to create income tax losses”); Thompson v. Commissioner, 631 F.2d 642 (9th Cir.1980) (economic substance); Karme v. Commissioner, 673 F.2d 1062 (9th Cir.1982) (economic substance). 1

*357 I express no…

843 F.2d 351 61 A.F.T.R.2d 88 -926, 88-1 USTC P 9248 , 25 Fed. R. Evid. Serv. 316 James E. SOCHIN, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Dennis S. BROWN, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Nos. 87-7024, 87-7032. United States Court of Appeals, Ninth Circuit. Argued and Submitted Dec. 16, 1987. Decided March 29, 1988. Joseph Wetzel, Wetzel & DeFrang, Portland, Or., for petitioners-appellants. Michael C. Durney, Acting Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D.C., for respondent-appellee. Appeal from a Decision of the Tax Court of the United States. Before CHOY, GOODWIN and BEEZER, Circuit Judges. CHOY, Circuit Judge: 1 James Sochin and Dennis Brown ("Taxpayers") appeal from the tax court's deficiency determinations. The court disallowed the losses and expenses deducted by Taxpayers with respect to investments in straddle transactions involving forward contracts. The court held that the transactions were "factual shams." Brown v. Commissioner, 85 T.C. 968, 998-1000 (1985). On appeal, Taxpayers allege that the tax court: 1) failed to apply the proper legal standard for…