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.
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