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GREENE v. UNITED STATES

August 28, 1997

LEONARD GREENE and JOYCE GREENE, Plaintiffs, against UNITED STATES OF AMERICA, Defendant.


The opinion of the court was delivered by: PARKER

 BARRINGTON D. PARKER, JR., U.S.D.J.

 This matter, which is before this Court following remand from the United States Court of Appeals, involves the income tax consequences arising from the donation of futures contracts by Leonard Greene and Joyce Greene (collectively "the Greenes") to the Institute for Socioeconomic Studies ("the Institute"), an exempt private operating foundation under 26 U.S.C. § 501(c)(3). See Greene v. United States, 79 F.3d 1348 (2d Cir. 1996) (Greene II). The Greenes' donations have been the subject of a number of prior proceedings. See Greene v. United States, 806 F. Supp. 1165 (S.D.N.Y. 1992); Greene v. United States, 13 F.3d 577 (2d Cir. 1994) (Greene I) Greene v. United States, 864 F. Supp. 407 (S.D.N.Y. 1994). Familiarity with these opinions is assumed.

 Greene II considered, inter alia, whether 26 U.S.C. § 1256 required recognition by the Greenes of the economic gain accrued with respect to the donated futures contracts before they were transferred to the Institute. Section 1256 -- titled "Section 1256 contracts marked to market" *fn1" -- provides in relevant part:

 
(a) General Rule. For purposes of this subtitle --
 
(1) each section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year),
 
(2) proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of paragraph(1).
 
(3) any gain or loss with respect to a section 1256 contract shall be treated as --
 
(A) short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and
 
(B) long-term capital gain or loss, to the extent of 60 percent of such gain or loss,
 
* * *
 
(c) Terminations, etc. --
 
(1) In general. -- The rules of paragraphs (1), (2), and (3) of subsection (a) shall also apply to the termination (or transfer) during the taxable year of the taxpayer's obligation (or rights) with respect to a section 1256 contract by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse, or otherwise.

 According to § 1256, a taxpayer's futures contracts are annually treated as if sold for fair market value on the final business day of the tax year. As every contract is "constructively sold" each year, a taxpayer must recognize accrued gains and losses annually by marking-to-market. See Greene II, 79 F.3d at 1354. In § 1256(c)(1) "this mark-to-market rule is applied to instances where taxpayers terminate or transfer their obligations or rights under a regulated futures contract. That is to say, the futures contract must not only be marked ...


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