Second Circuit Court of Appeals Rules in Favor of Compass Lexecon Client in Tax Dispute

In its May 22, 2017 decision, the United States Tax Court rejected the claim of the Commissioner of Internal Revenue that the Estate of Andrew J. McKelvey owed $41 million in taxes with respect to McKelvey’s 2008 income tax return for omitting what the Commissioner alleged were short‐ and long‐term capital gains arising from the execution of new contracts extending the valuation dates of two variable prepaid forward contracts. Following an appeal by the Commissioner of Internal Revenue, the Second Circuit Court of Appeals issued a ruling on September 26, 2018 reversing the United States Tax Court’s prior ruling in favor of the Petitioner, and remanding the case for (1) determination of whether the termination of obligations that occurred when the new contracts were executed resulted in taxable short‐term capital gains, and (2) calculation of the amount of long‐term capital gains that resulted from the constructive sales of the collateralized shares. In reaching this ruling the appellate court conducted a de novo review of the stipulated record and relied on the report of Compass Lexecon Affiliate Professor Hendrik Bessembinder, which is cited extensively in the appellate court’s opinion.

David J. Ross and Kevin Hartt in Compass Lexecon’s Chicago office assisted Professor Bessembinder in the preparation of his report. We were retained by counsel for the Internal Revenue Service and worked close with Steven N. Balahtsis and Steven A. Sirotic.