McWilliams managed the large
independent estate of his wife, as well as his own. On a number of
occasions, McWilliams sold stock from one account and on the very same say
bought the same amount of stock for the other account at the same price.
Even though both
transactions were made independently on the open market, effectively,
McWilliams was just moving the shares from one account to the other.
When he filed his taxes, McWilliams
claimed losses from the sale of shares and deducted them from gross
income. The IRS disagreed.
The IRS argued that the tax
code (then 26 U.S.C. §24(b), now 26
U.S.C. §267) prohibited deductions
for losses from sales or exchanges or property, directly or indirectly,
between members of a family.
McWilliams argued that the
shares sold by one account were not the same exact shares bought by the
other account, so §24(b) didn't
apply. In addition, the sale wasn't made "between" Mr. and
Mrs. McWilliams, they were two totally independent transactions.
McWilliams noted that both
the sale and purchase were through a public market and to separate
individuals.
The Tax Court found for
McWilliams. The IRS appealed.
The Appellate Court reversed.
McWilliams appealed.
The US Supreme Court affirmed.
The US Supreme Court found
that the purpose of §24(b) was to
stop taxpayers from being able realize tax losses on investments which
they continue to own.
The Court found that
Congress did not intend to leave a loophole that would make 24(b) inapplicable to stocks or other fungible
property.
Fungible property is the
sort of thing where one is exactly like the other. Even though the
stock certificates McWilliams bought had different serial numbers than
the ones he sold, effectively they were the same exact thing.
The Court looked to the
specific wording on §24(b) and
found that is prohibited inter-family sales either "directly or
indirectly." The Court concluded that McWilliams' actions were an
"indirect" sale.
Basically, §267 kicks in even if the sale isn't directly
between the taxpayer and a family member. The important thing is whether
the property was effectively transferred between the family members.
