## Facts

- Maxwell J. Estroff and his wife, Naomi, realized substantial long-term capital gains in 1974 from selling a co-owned corporation.
- The couple owned 21,559 shares of First Railroad and Banking Co. of Georgia stock with an aggregate basis of about $323,943.69.
- To create a capital loss to offset 1974 gains, Maxwell arranged a stock transaction with Jack Fink, a longtime friend and business associate.
- On October 1, 1974, Maxwell and Naomi sold all 21,559 shares to Fink at $6.25 per share for $134,743.75 (less a $750 commission); the sale would generate a large loss if respected.
- On October 8, 1974, Maxwell loaned Fink $135,000, which Fink used to pay for the stock; title was recorded in Fink’s name.
- On November 4, 1974 (34 days after the initial sale), Fink sold the same shares back to Maxwell at the same $6.25 per share price, despite higher contemporaneous quoted prices.
- Fink used the repurchase proceeds to repay Maxwell’s loan.
- The 1974 joint return claimed the capital loss; the IRS disallowed it and determined deficiencies for 1974 and 1975 and additions to tax for negligence under former I.R.C. § 6653(a).

## Issues

1. Whether the claimed loss was disallowed under I.R.C. § 1091 as a wash sale because the taxpayers, in substance, reacquired substantially identical stock within the statutory window or had a contract/option to do so.
2. Whether the purported sale and repurchase should be disregarded as lacking economic substance and thus not producing a deductible loss.
3. Whether the taxpayers were liable for additions to tax for negligence or intentional disregard of rules and regulations under former I.R.C. § 6653(a).

## Decision

- The Tax Court sustained the IRS’s disallowance of the claimed capital loss.
- The court treated the arrangement as within the wash sale rule of § 1091, focusing on the prearranged plan and practical assurance of reacquisition.
- Independently, the court concluded the transaction lacked economic substance because beneficial ownership and market risk did not meaningfully shift.
- The court upheld the deficiencies for 1974 and 1975.
- The court sustained additions to tax for negligence under former § 6653(a).

## Legal Principles

- Section 1091 bars recognition of a stock loss where a taxpayer, within the statutory period, reacquires substantially identical stock or effectively secures reacquisition through a prearranged understanding functioning as a contract or option.
- Courts evaluate wash sale questions by examining substance, including prearrangement, circular financing, and whether the intermediary bears meaningful market risk.
- A loss may be disallowed even apart from § 1091 when the steps constitute a circular, tax-motivated transaction lacking economic substance and not effecting a real change in beneficial ownership.
- Under former § 6653(a), the taxpayer bears the burden to show an underpayment was not due to negligence; contrived loss-generation transactions without credible non-tax justification support negligence additions.

## Conclusion

The Tax Court disallowed the taxpayers’ claimed stock loss because the sale-and-repurchase scheme, financed by the seller and fixed to return the same shares, functioned as a wash sale and lacked economic substance; the court also sustained the IRS’s negligence additions to tax.


Estate of Estroff v. Comm’r, T.C. Memo. 1983-666 (1983)