United States v. Regan

James Regan (defendant) was a managing partner of Princeton-Newport Partners (PN) (defendant), a stock-brokerage firm. Regan was the firm’s tax expert. On Regan’s advice, PN engaged in a number of transactions in which PN temporarily sold stock to other brokerage firms at a loss so that it could deduct the losses on its tax returns. PN would later repurchase the stock from the other firms at an agreed-upon repurchase price rather than the market price at the time of repurchase. When PN sold the stock to the other firms, it made an oral agreement to repurchase the stock sometime in the future. While the other firms owned the stock, they had complete control over the stock purchased from PN. PN had no enforceable right to repurchase the stock sold to other firms. Regan believed that the tax deductions taken from these transactions were proper and that they were not considered stock-parking transactions under Internal Revenue Code (I.R.C.) § 1058. Regan based his opinion on communications with PN’s accountants, a New York City bar-association report, and his own interpretation of relevant statutes and regulations. The government (plaintiff) charged Regan and PN with tax fraud based on these alleged stock-parking transactions. At trial, Regan and PN sought a jury instruction stating that if they relied on a good-faith belief that their actions complied with I.R.C. § 1058, they could not be held criminally liable for tax fraud. The court declined to give such an instruction because it had determined that PN had violated § 1058 as a matter of law. Regan and PN were convicted of tax fraud in addition to several other crimes. Regan and PN appealed.