## Facts

- Michael J. Scully and Peter D. Scully served as trustees of multiple family trusts, including two “Buying Trusts” created in 1959 and several “Selling Trusts” funded through a later estate plan.
- The Selling Trusts faced estate tax and administration obligations and needed liquidity.
- To raise cash, the trustees sold 980 acres of farmland from the Selling Trusts to the Buying Trusts for $1,550 per acre, based on an appraisal used in the estate valuation.
- The government took the position that the Selling Trusts’ basis in the land was $2,075 per acre, creating an apparent loss of $525 per acre on the sale.
- The trustees filed refund claims totaling $274,583, asserting the Selling Trusts sustained a deductible loss.
- The trusts’ operations and ownership interests substantially overlapped: the same trustees controlled both sides; beneficiaries were the trustees’ children; the land was contiguous and used a unified drainage system; tenants were not aware of separate ownership among the trusts.

## Issues

1. Whether the Selling Trusts’ reported loss on the sale of farmland to related family trusts was a “bona fide” loss deductible under I.R.C. § 165.
2. Whether a transaction that largely shifts assets within commonly controlled family trusts, without meaningful separation of economic interests, can generate a deductible loss.

## Decision

- The Seventh Circuit affirmed judgment for the United States.
- The court held the claimed loss was not deductible under I.R.C. § 165 because the trustees failed to show a bona fide economic loss.
- The court affirmed on § 165 grounds rather than the district court’s reliance on I.R.C. § 267 related-party loss provisions.
- The trusts were not entitled to the claimed refunds.

## Legal Principles

- A deduction under I.R.C. § 165 requires a bona fide loss reflecting a genuine economic loss, not merely an accounting loss produced by basis and sale price.
- Losses from transactions between commonly controlled related parties may be disallowed when the transaction does not materially change the economic interests at stake.
- Evidence of fair pricing and non-tax motives does not, by itself, establish a § 165 deductible loss if the transaction lacks substantive economic separation.
- An appellate court may affirm a correct judgment on any ground supported by the record, even if different from the district court’s rationale.

## Conclusion

Because the land transfer occurred within closely integrated family trusts controlled by the same trustees and benefiting substantially the same family members, the transaction did not produce a bona fide economic loss; therefore, § 165 did not permit the claimed loss deduction and the refund claims were properly denied.


Scully v. United States, 840 F.2d 478 (7th Cir. 1988)