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October 13, 1994



The opinion of the court was delivered by: GERARD L. GOETTEL


 Plaintiffs Leonard and Joyce Greene are suing the United States for a refund of a total of approximately $ 2.8 million in taxes, interest and penalties assessed by the Internal Revenue Service ("IRS") in connection with their tax returns for the years 1984 through 1987. The parties have cross-moved for summary judgment.


 The pertinent facts of this case are not disputed. In the early 1970s, Leonard Greene founded the Institute for Socioeconomic Studies (the "Institute") and since then he has served as the Institute's president and as a director. The Institute is an exempt private operating foundation under 26 U.S.C. §§ 501(c)(3), 509(a) and 4942(j)(3).

 In 1974, Greene received a private letter ruling ("the Ruling") from the IRS concerning the tax consequences of Greene's proposed plan to contribute futures contracts to the Institute. Greene's apparent reason for seeking the Ruling, as indicated in the Ruling itself, was that the New York Commodity Exchange, Inc. would not recognize the transfer of Greene's interest in the contracts to a third party.

 The IRS ruled that Greene would be entitled to a charitable contribution deduction for the fair market value of the contracts and would not realize any gain or loss of personal income, provided (1) that Greene transferred all of his equitable rights and interests in the contracts to the Institute, retaining only bare legal title, (2) that Greene executed an irrevocable power of attorney granting the Institute complete power to determine when and if the contracts were to be sold, and (3) that the amounts that Greene would have received from the sales would be paid directly to the Institute.

 At various times in 1974 through 1978 and in 1980, the Greenes made charitable contributions to the Institute of commodities futures contracts according to the terms of the Ruling. The IRS audited the Greenes' returns for one or more of those years, and determined that no change was required in the returns.

 The Economic Recovery Tax Act of 1981, Pub. L. No. 97-34, 95 Stat. 172 (1981) ("ERTA"), altered the tax landscape for donations of futures commodities. As amended, 26 U.S.C. § 1256 provided that gains or losses from any termination of a taxpayer's obligations or rights under such contracts would be treated as 60% long-term and 40% short-term capital gain or loss. This was a significant change, since § 170 of the Internal Revenue Code (the "Code") does not permit a charitable donation deduction for the value of donated property which would have been short-term gain to the taxpayer if the taxpayer had sold the property.

 Accordingly, when Greene donated futures commodities contracts to the Institute between 1982 and 1987, he donated only the portion of the futures contracts that was characterized under § 1256 as long-term gain, while retaining for himself the short-term gain portion of the contracts. Each of these donations was made pursuant to an agreement between Greene and the trustee for the Institute, Ralph Spector.

 Pursuant to these agreements, the futures contracts Greene wished to donate to the Institute were transferred from Greene's personal accounts at Merrill Lynch Pierce Fenner & Smith ("Merrill Lynch") into a Special Account at Merrill Lynch which was controlled by a trustee of the Institute. Each of the futures contracts so transferred was sold shortly thereafter pursuant to standing instructions given by the trustee for the Institute to Merrill Lynch. The portion of the proceeds from such sales representing long-term capital gains was transferred to an Institute account at Merrill Lynch, and the portion of such proceeds representing short-term capital gains was transferred to Greene's account at Merrill Lynch.

 For each tax year from 1982 through 1987, the Greenes recognized, reported and paid income tax on an amount equal to the short-term capital gain realized upon the sale of the selected futures contracts. The Greenes did not recognize and report as income an amount equal to the long-term capital gains realized upon the sale of the selected futures contracts.

 On September 6, 1990 the Commissioner of the IRS issued a Notice of Deficiency to the Greenes for the tax year 1982. The IRS determined that the Greenes were required to recognize and report as income an amount equal to the long-term capital gain portion of the commodities futures contracts they had donated to the Institute. The Greenes were allowed a charitable contribution deduction of cash in an amount equal to the long term capital gain realized on the sale of the selected futures contracts pursuant to 26 U.S.C. § 170. After paying the amount assessed by the IRS for the tax year 1982, the Greenes filed an action for refund of taxes, which action was assigned to this court.

 In that case, the IRS based its position on two separate theories. See Greene v. United States, 806 F. Supp. 1165, 1168-73 (S.D.N.Y. 1992) ("Greene I"), aff'd, 13 F.3d 577 (2d Cir. 1994). First, the IRS argued that under the anticipatory assignment of income theory, Greene's donation of a portion of the unrealized gains in certain futures contracts was in substance an assignment of a portion of realized income. Id. at 1168. We rejected this claim, as did the Second Circuit, on the grounds that Greene did not have a fixed right to income at the time the transfer was made, nor did he have control over the sale of the donated futures contracts. 13 F.3d at 581-83; 806 F. Supp. at 1168-72. We also rejected, as did the Second Circuit, the IRS's argument under the step transaction doctrine that Greene's donation of futures contracts and their subsequent sale by the Institute were merely separate steps in a single transaction. 13 F.3d at 583-85; 806 F. Supp. at 1172-73.

 In March, 1992, the IRS issued to the Greenes a Notice of Deficiency for the tax years 1983 through 1987. As in the earlier Notice, the IRS determined that the Greenes were required to recognize and report as income an amount equal to the long-term capital gain portion of the donated commodities futures contracts. However, this time the IRS did not allow the Greenes any charitable contribution for the amounts donated, on the ground that the donations were non-deductible partial interests. Once again, the Greenes paid the IRS in full and then commenced this lawsuit seeking a refund.


 To prevail on a motion for summary judgment, a party must demonstrate "that there is no genuine issue as to any material fact and that [it] is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The instant dispute is entirely over the interpretation of the relevant law - no factual disputes are involved.

 The government has conceded the assignment of income and step transaction theories for purposes of this case, but has set forth two other theories in support of the IRS's action with respect to the tax years 1983 through 1987. First, the government argues that the Greenes donated only a partial interest in the commodities futures contracts, and thus are not entitled to a charitable deduction pursuant to 26 U.S.C. § 170. Second, the government argues that under 26 U.S.C. § 1256, as amended by ERTA, the Greenes were required to recognize as income the capital gains in the futures contracts when they donated them to the Institute.

 1. Collateral Estoppel

 Before reaching the government's arguments, we consider the Greenes' contention that they are entitled to summary judgment based on the doctrine of collateral estoppel. The general theory of collateral estoppel has been summed up by the Supreme Court thus: "Under collateral estoppel, once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation." Montana v. United States, 440 U.S. 147, 153, 59 L. Ed. 2d 210, 99 S. Ct. 970 (1979).

 In Montana, also a tax case, the Supreme Court set out a three-part test for determining whether collateral estoppel applies: "first, whether the issues presented by [the second] litigation are in substance the same as those resolved [in the first]; second, whether controlling facts or legal principles have changed significantly since the [first] judgment; and finally, whether other special circumstances warrant an exception to the normal rules of preclusion." Id. at 155.

 Plaintiffs argue that the issue of whether the Greenes donated only a partial interest in the futures contracts was decided in their favor by this court's opinion in Greene I. According to plaintiffs, one of the government's arguments in Greene I was that the Greenes had donated only a partial interest in the futures contracts, and thus should not be entitled to a charitable deduction. There is some support for this argument, since Section E, the last section of the government's Greene I brief, includes these words:

Assuming arguendo, that Greene donated the long-term capital gain portion of the futures contracts, he contributed less than his entire interest in the futures contracts. Because he did not transfer this partial interest in trust, his entire claimed charitable contribution is not an allowable deduction. Therefore, the contribution as structured by Greene could not in any event result in an allowable charitable deduction under Section 170(a).

 Memorandum of Law in Support of the Government's Motion for Summary Judgment at 27-28, Greene I (footnotes and citations omitted).

 Plaintiffs argue that even though our decision in Greene I made no mention of the partial interest issue, this court implicitly decided the issue in plaintiffs' favor by entering judgment for plaintiffs. This court could not have entered judgment for plaintiffs, plaintiffs argue, if we had agreed with the government's partial interest theory. See Dennis v. Rhode Island Hosp. Trust Nat'l Bank, 744 F.2d 893, 898-99 (1st Cir. 1984) ("An issue may be 'actually' decided even if it is not explicitly decided, for it may have constituted, logically or practically, a necessary ...

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