Samueli v. CIR

A securities loan with a fixed term entered for the purposes of avoiding taxable income does not qualify for non-recognition treatment.

Henry and Susan Samueli and Thomas and Patricia Rick (taxpayers) are both married couples who filed a joint tax return in 2001 and 2003. The taxpayers purchased security that had a fixed return rate, but was purchased at a price computed using a variable interest rate, because the short-term interest rate was expected to fall. The taxpayers claimed an interest deduction related to the security on their 2001 taxes and a capital gains report appeared on their 2003 taxes for proceeds less the purchase price and costs. The Commissioner of Internal Revenue (CIR) rejected this characterization; CIR claimed a deficiency for both taxpayers and they sought the Tax Court’s re-determination. The Tax Court granted summary judgment for CIR on both claims. Taxpayers appealed. The Ninth Circuit AFFIRMED the Tax Court based on the statute-in-question’s plain language and because the loan did not comport with the assumptions and purposes of the statute.