## Facts

- Two trusts created for Harris R. Fender’s sons reported significant 1969 capital gains and sought to offset them with a claimed capital loss from municipal bonds.
- The trusts purchased unrated, nonmarketable Bender Road Improvement District bonds for $435,017 (par value $445,000).
- On December 26, 1969, the trusts sold the bonds over the counter to Longview National Bank & Trust Company for $225,000 plus accrued interest, producing a claimed loss of $106,258.35 per trust.
- At the time of the sale, Fender controlled approximately 40.7% of the bank’s stock directly and through the trusts; the combined interest later rose to about 50.15%.
- Forty-two days later, on February 6, 1970, the trusts repurchased the same bonds from the bank for $224,735 plus accrued interest.
- The IRS disallowed the loss deductions, assessed additional taxes and penalties, and the trusts paid and sued for refunds.
- The district court found a bona fide sale and awarded refunds; the United States appealed.

## Issues

1. Whether the trusts’ late-1969 sale and early-1970 repurchase of the same unrated municipal bonds through a bank substantially controlled by the trustee constituted a bona fide sale producing a deductible loss under I.R.C. § 165.

## Decision

- The Fifth Circuit reversed the district court’s judgment for the taxpayers.
- The court held the transaction was not a bona fide sale and did not produce the kind of real, realized loss required by I.R.C. § 165.
- The court disallowed the claimed loss deductions and thereby rejected the refund claim.

## Legal Principles

- A loss deduction under I.R.C. § 165 requires an actual economic loss realized through a closed and completed transaction, not a paper loss created by circular dealings.
- Courts evaluate the substance of a sale-and-repurchase sequence, including whether the taxpayer effectively retained the benefits and burdens of ownership.
- A short holding period between disposition and reacquisition, minimal price variation, and an accommodation purchaser strongly indicate the taxpayer did not truly relinquish the property.
- Transactions structured primarily to generate a year-end tax loss, without a substantive change in the taxpayer’s economic position, may be disregarded for § 165 purposes.
- Substantial taxpayer influence over the counterparty (even if not covered by specific wash-sale provisions) can support treating the arrangement as lacking economic reality.

## Conclusion

The Fifth Circuit held that the trusts’ sale of bonds to a bank substantially controlled by the trustee, followed by a near-immediate repurchase at nearly the same price, failed to produce a real, realized loss under I.R.C. § 165 because the transaction left the trusts’ economic position essentially unchanged and functioned chiefly to create a tax loss for 1969.


Fender v. United States, 577 F.2d 934 (5th Cir. 1978)