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corporation taxable under sections 1371 to 1379. The
undistributed taxable income was included in the gross income of
the shareholders. Sec. 1373(a). While Brown Transport generated
a large amount of income, income taxes on its shareholders
substantially reduced the amount of capital they could invest,
and the needed capital was in part generated from the purported
deferral of income tax generated from the ACLI and ELMS
transactions. Accordingly, the tax deferral efforts focused on
the tax labilities of Messrs. Brown and Hemmings, both of whom
had transactions with ACLI and ELMS.
The parties have not suggested that there were material
differences between the ACLI and ELMS programs, and consistent
with this approach we treat the programs as being substantially
similar in all relevant aspects. W. Paul Harris (Mr. Harris), a
certified public accountant for Brown Transport, Mr. Brown, and
the Hemmingses, primarily handled the ACLI and ELMS transactions.
The ACLI transactions involved purported straddles of
forward contracts for securities issued by the Government
National Mortgage Association commonly called "Ginnie Mae". The
sides of the straddles involved commitments to purchase millions
of dollars of these securities. The loss legs of the contract
straddles would be "canceled", purportedly giving rise to an
ordinary loss rather than a capital loss. The ELMS transactions
were similar, but the underlying securities were Treasury bills
and the purported trades were transacted with Arbitrage
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Last modified: May 25, 2011