market at the time of termination or transfer -- here, the time of donation to charity -- and recognize any economic gain." Id. at 1358.
On remand, the Greenes' position is that Greene II did not address, and thus left for resolution by this Court, precisely how to calculate the amount, if any, of "economic gain" they experienced as a consequence of their contributions to the Institute. Specifically, while conceding that, pursuant to § 1256, they must mark-to-market all contracts held at year-end, they argue that a second step is required that the Court of Appeals did not have occasion to consider in Greene II, namely, making the "proper adjustment," under 26 U.S.C. § 1256(a)(2), for the amount "subsequently realized" upon the transfer of the futures contracts.
The Greenes urge this Court, in making that "proper adjustment," to adopt the definition of "amount realized," as set forth in 26 U.S.C. § 1001(b).
Applying that definition to their own situation, the Greenes contend that their donation of futures contracts has yielded them no "economic gain" because they, in fact, received no money or property in exchange for that donation. As a result, they claim that they are entitled, under § 1256(a)(2) to a "proper adjustment" in the form of an offset against the constructive gain said to have been "realized" under § 1256(a)(1)'s mark-to-market rules. According to the interpretation of § 1256 and § 1001 advanced by the Greenes, the gain recognized by marking-to-market, and which is subject to taxation, should be reduced to zero.
The government, on the other hand, contends that the question of how to interpret § 1256(a)(2)'s "proper adjustment" language has already been addressed and resolved by the Court of Appeals. Specifically, the government points to the Court of Appeals' reading of Section 1256 as requiring the Greenes to mark their long-term capital "gain to market and recognize it as income before the contract is donated to charity." Greene II, 79 F.3d at 1357.
The government further argues that subsection 1256(a)(2) -- the starting point of plaintiffs' argument that their gain should be reduced to zero -- only allows for the proper adjustment of gain or loss upon termination of the taxpayer's interest in futures contracts to reflect prior marked-to-market gains and losses recognized before the taxpayer terminated his interest in the contracts.
Thus, according to the government, the "proper adjustment" provision of § 1256(a)(2) merely gives the taxpayer a "stepped-up" or "stepped-down" basis -- to the extent that the taxpayer reported marked-to-market gain or losses on his futures contract in the prior taxable year pursuant to § 1256(a)(1) -- in respect of futures contract still held at the beginning of the following year. Thus for example, if a taxpayer acquires a futures contract in 1995, that contract must be marked-to-market on December 31, 1995 (the last business day of the taxable year) and the unrealized gain or loss recognized and reported in 1995. See 26 U.S.C. § 1256(a)(1). Assuming the contract has increased in value by $ 2,000 on December 31, 1995, the taxpayer would recognize gain of $ 2,000. Accordingly, on January 1, 1996, the taxpayer's "basis" in the contract is increased by $ 2,000 to reflect the gain reported in 1995. See 26 U.S.C. § 1256(a)(2); Greene II, 79 F.3d at 1354. If the taxpayer terminates his interest in the futures contract by transferring it to a charity (or by any other means) in 1996, the taxpayer must mark the contract to market on the date of the transfer and recognize any inherent gain or loss at the time of the termination. See id. at 1355. If the contract on the date of transfer had further appreciated in value for a total gain of $ 3,000, the taxpayer must recognize gain of $ 1,000 ($ 3,000 increase in value less $ 2,000 "basis" for gain already recognized in 1995).
The Greenes respond by arguing that construing 26 U.S.C. § 1256(a)(2) to apply to gains or losses recognized before the charitable donation is a selective reading that fails adequately to consider the various provisions of § 1256 -- specifically the requirement in § 1256(a)(2) that a "proper adjustment shall be made" for any gain or loss subsequently realized. The Greenes argue such failure to provide, in the manner they propose, for a "proper adjustment" would mean, in effect, that taxes are imposed when in actuality the taxpayer has received "no economic gain."
Were this Court writing on a clean slate, there might be some symmetry to the Greenes' position. The Court of Appeals, however, construed 26 U.S.C. § 1256(a)(2) to provide for "proper adjustment" in gains or losses previously recognized under the mark-to-market system when the taxpayer's interest in the futures contracts are terminated by a transfer to charity. The Court of Appeals further explained that the purpose of § 1256(a)(2) was to insure that the taxpayer is taxed only on actual accessions to wealth from the date of the transfer and is designed to avoid the otherwise inequitable result of requiring the taxpayer to pay duplicative taxes on gains required to be realized when the mark-to-market rules are triggered:
The statute takes into account the gain or loss constructively received during the previous year. This presents double taxation and double deduction. In other words, when a taxpayer's futures contract declines in value in Year 2 but increases in Year 3, the contract's value at the end of Year 2 serves as the basis when the taxpayer determines liabilities in Year 3. In this fashion, a taxpayer claiming a deduction in Year 2 cannot deny liability in Year 3 by referring to a year one basis. 26 U.S.C. § 1256(a)(2).
Greene II, 79 F.3d at 1354.
The Greenes' intention to bestow a public good has foundered, at least in part, on a statute requiring gain or loss to be recognized whether or not actually realized by the holder of futures contracts. The statute forces the Greenes, in effect, to treat their contributions as cash as opposed to contributions of investment contracts, see Greene II, 79 F.3d at 1357, and does not accommodate the adjustment under § 1256(a)(2) that they seek. The parties are instructed to settle a judgment in 21 days.
BARRINGTON D. PARKER, JR.
Dated: White Plains, New York
August 28, 1997