The theme for today is: "Hurrah! The Taxpayer Lost!"
Judge Rawlinson writes a brief concurrence that describes Judge Tashima's opinion as "excellent." I agree. Yes, we want securities lending; that way the market can more effectively allow short-selling of securities, a practice that in turn makes the market somewhat more efficient. Yes, we do not want the tax laws to overly burden this practice, and so in a legitimate loan -- where no risk of loss transfers -- we don't recognize that as a tax recognition event.
But that's not what Henry Samueli -- the billionaire co-founder of Broadcom -- was doing. Sure, he was making a bet on short-term interest rates. A nominal bet of $1.7 billion, no less. This indeed exposed him to gains and losses in the market, so this wasn't a "fake" transaction designed entirely for tax avoidance.
But the reason he employed a securities loan as a fundamental portion of that transaction was. He could have easily made the bet without the loan. But he did the loan portion of the deal to enable the taxpayer to make this bet while simultaneously (1) getting the benefits taxed at low capital gains rates, while (2) getting the expenses (interest) deducted at the much-higher marginal rates. That's the economic substance of this portion of the transaction. And it shouldn't -- and thankfully doesn't -- work.
The IRS is not overreaching here. It's instead doing exactly what I'd hope it would. Great job, IRS, Tax Court, and Ninth Circuit.
