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losses, BJB sold petitioner’s pledged stock.2 From these sales
of the pledged stock, he realized substantial gains during 1992
and 1993.
Lloyd’s Closing Agreement and Filing Procedure
In 1990, in an effort to provide uniform tax treatment to
United States and non-United States underwriters of Lloyd’s, the
underwriters, Lloyd’s, and the IRS entered into a closing
agreement. The closing agreement bound all United States Names,
including petitioner, to report all underwriting profits and
losses and all investment income from Lloyd’s activities as
income or loss from a passive activity. Thus, pursuant to the
closing agreement, petitioner treated the losses incurred by the
syndicates in which he participated as passive losses. The
closing agreement did not address the tax treatment of gains or
losses realized on the disposition of assets held as security for
a letter of credit provided for the underwriting activities.
Discussion
On his 1992 and 1993 tax returns, petitioner reported the
gain from the sale of the pledged stock as passive income and
offset the gain by the passive losses from his underwriting
activities. Respondent disagrees with this treatment and argues
that the gain is portfolio income which cannot be offset by
2 We assume that Lloyd’s drew upon petitioner’s letter of
credit thereby precipitating the sale of petitioner’s pledged
stock by BJB.
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