Estate of Estroff v. Commissioner

Maxwell Estroff (Estroff) and his wife Naomi were married and filed joint income-tax returns in 1974 and 1975. Maxwell subsequently died, and Naomi and another executrix filed this suit on behalf of Maxwell’s estate (plaintiff). Maxwell and his friend Jack Fink owned a business together, making and selling clothing for the Army, Air Force, and, subsequently, the public. Maxwell and Fink sold a co-owned corporation in 1974, and each had long-term capital gains from the sale. Meanwhile, Maxwell and Fink also owned common stock in the First Railroad and Banking Company of Georgia (First Railroad). Maxwell was advised to organize a sale of his stock at a loss to offset some of the capital gains. Accordingly, Maxwell and Fink agreed that Maxwell would sell 21,559 shares of First Railroad to Fink. Maxwell would also loan Fink the money to purchase the stock, with Fink also agreeing to sell back the stock after a minimum of 30 days and use the funds received to pay off the loan. Accordingly, on October 1, Maxwell sold 7,486 shares and Naomi sold 14,073 shares of First Railroad stock to Fink for $6.25 per share for $134,743.75. The full amount, less a $750 commission to the broker, was paid to Maxwell. Maxwell and Naomi had a combined basis of $323,943.69 in the stock on the sale date. On October 8, Maxwell loaned Fink $135,000, which Fink used to pay for the First Railroad stock. The transfer was registered on the books of First Railroad. On November 4, Fink sold the 21,559 shares back to Maxwell for $6.25 per share (despite the low bid being 6¾ and the high ask 7½ on the sale date). Fink used the funds to repay his loan from Maxwell. Maxwell and Naomi then claimed a loss on the First Railroad stock sale, but the Commissioner of Internal Revenue (the commissioner) (defendant) denied the claimed loss. The commissioner argued that this was a wash sale within the meaning of 26 U.S.C. § 1091(a). Maxwell argued that the sale-back of his stock was more than 30 days after its sale, and even if Maxwell and Fink entered a contract to sell back the stock, the contract was an unenforceable oral contract. The estate of Maxwell Estroff filed this suit and sought credit for the loss.