Washington, D.C., partner Matthew Stevens was quoted in a Tax Notes Today article discussing a recent Tax Court decision that a purported nonrecourse loan equal to 90 percent of the value of stock was a disguised sale of that stock. Stevens noted that, though the decision was ultimately correct, it was the concurring opinions that provided the stronger reasoning for the decision. “In reaching the right answer, the majority’s analysis woodenly applies Grodt & McKay Realty, largely ignores the well-established concept of a nonrecourse loan and fails to consider the deceptive aspects of [the promoter's] conduct,” he said. “Judge Halpern, by contrast, straightforwardly applies an analysis based on the cases involving the fungibility of publicly traded stock.” Another concurring opinion served as “an excellent discussion of the flaws inherent in using Grodt & McKay, but did not acknowledge the difficulties that applying the normal rule for sales of property securing a nonrecourse loan would raise in the context of the publicly traded stock.”
Speaking on the impact of the decision, Stevens noted that it “does raise the specter of a taxpayer being required to recognize gain in any situation in which a taxpayer’s shares are pledged to one with the right to sell them at will, if the taxpayer also receives nonrecourse funding.”