CPA Files Declaration in Tax Court Supporting Summary Judgment

GWA, LLC, George A. Weiss, Tax Matters Partner,
Petitioner
v.
Commissioner of Internal Revenue
Respondent

UNITED STATES TAX COURT

Judge Albert G. Lauber

DECLARATION OF ROBERT E. GENDREAU

I, Robert E. Gendreau, declare under penalty of perjury that, from personal knowledge, the following information is true and correct.

I. Employment History with George Weiss and Associates, Inc., Weiss Special Operations LLC, and Weiss Multi-Strategy Advisers LLC

1. I am a certified public accountant licensed in the State of Connecticut.

2. I began working for George Weiss and Associates, Inc., in 1998. In 2006, I became an employee of Weiss Special Operations LLC. In 2016, I became an employee of Weiss Multi-Strategy Advisers LLC, where I remain employed today as the Senior Vice President of Tax.

3. Since 1998,1 have assisted with or had oversight responsibilities with respect to tax matters for various entities, including GWA, LLC (“GWA”).

4. My responsibilities have included oversight responsibility for U.S. federal, state, and local tax compliance, including preparation and filing of U.S. federal income tax returns and related compliance matters.

5. In order to fulfill my U.S. federal income tax reporting and compliance responsibilities, I am required to have and do have knowledge of the activities conducted by and assets and liabilities held by GWA and each of its separate subsidiary operations.

6. I also was required to have and continue to have knowledge of the derivative contracts between GWA and Deutsche Bank AG (“Deutsche Bank”) including their terms, their economic performance, and GWA's income tax return positions relating to them.

II. GWA

7. During the years 1998 through 2010, GWA was a Connecticut limited liability company classified as a partnership for U.S. federal income tax purposes.

8. During 1998 through 2010, GWA did not directly conduct or engage in any trade or business. It held some securities and other property for long-term investment. Otherwise, GWA was a holding company of subsidiary entities formed under local law as limited liability companies.

9. One of the subsidiary entities that GWA owned was OGI Associates LLC (“OGI”).

10. During the years 1998 through 2010, GWA kept its own books and records.

11. GWA maintained separate bank accounts, general ledgers, trial balances, journal entries, charts of accounts, and other records.

III. OGI Associates LLC

12. During the years 1998 through 2010, OGI was a Connecticut limited liability company that from May 28, 1998 through 2010 was disregarded as an entity for U.S. federal entity classification purposes.

13. During the years 1998 through 2010, OGI kept its own books and records.

14. OGI maintained separate bank accounts, general ledgers, trial balances, journal entries, charts of accounts, and other records.

15. From May 28,1998 through 2010, OGI engaged in its own name and under its own legal authority in a trade or business as a trader in securities.

16. OGI held security positions in connection with its securities trading business in prime brokerage accounts that it owned.

17. From May 28,1998, OGI, as a disregarded entity, reported its gains and losses on GWA's U.S. federal income tax return.

IV. Derivative Contracts Between GWA and Deutsche Bank

18. Beginning in April 2003, GWA entered into ten similar bilateral derivative contracts with Deutsche Bank as the issuer and counterparty (collectively, the “Contracts” and each a “Contract”). Five of the Contracts are the subject of this litigation.

19. The first Contract was entered into on April 15, 2003, and terminated on April 30, 2009.

20. The second Contract was entered into on May 22, 2003, and terminated on December 21, 2005.

21. Four additional contracts were entered into on December 21, 2005, and terminated on December 22, 2006.

22. The final four Contracts were entered into on December 12, 2006.

23. Three of the final four Contracts were terminated on May 14, 2010, and the remaining one was terminated on May 21, 2010.

24. Each Contract had a term of twelve years but could be terminated every two or three years, depending on the specific terms of the Contract, at Deutsche Bank's election. Deutsche Bank could also terminate the Contracts at its election upon the occurrence of certain events, including the decline in the notional value of a Contract below certain amounts.

25. Each Contract gave GWA the opportunity to substantially enhance its investment return by providing implicit leverage relative to GWA's premium (up to ten times for its long positions and ten times for its short positions).

26. By their terms, the Contracts could not be offered, sold, or otherwise traded, and thus were nonmarketable.

27. The Contracts were required to be cash settled. Upon termination of each of the ten Contracts, Deutsche Bank made cash payments to GWA.

V. GWA's Form 1065

28. Attached as Exhibit A-1 is a true and correct copy of GWA's 1998 Form 1065, U.S. Return of Partnership Income.

29. GWA's 1998 U.S. federal income tax return included a statement, attached separately as Exhibit A-2, which by its terms was an election made by OGI under section 475(f)(1) of the Internal Revenue Code to mark to market securities OGI directly held in the securities trading business that OGI conducted with securities that it owned.

30. On GWA's tax returns for 1998 and each year thereafter, GWA reported gains and losses on securities that OGI held at year-end in connection with OGI's securities trading business as if they were sold on the last day of such year for their fair market value.

31. GWA did not apply section 475(f) to the Contracts or to other property that it directly held.

32. Under section 1001 and section 1234A, GWA reported the termination of each Contract as a sale or exchange of a capital asset held for more than one year and reported the resulting gain as long-term capital gain. Because GWA had not marked any Contract to market at the end of taxable years ending before the year of termination, the amount of long-term capital gain reported was the excess of the termination payment over GWA's basis in the terminated Contract.

33. In 2009 and 2010, GWA recognized and reported over $526 million of long-term capital gain from the termination of the Contracts. If GWA had been required to mark to market the Contracts at the end of each taxable year that occurred during their respective terms, the gain that GWA would have been required to report on termination of the Contracts in 2009 and 2010 would have been a small fraction of the gain reported on GWA's federal income tax returns for those years.

34. The applicable assessment periods under former section 6229 and section 6501 for underpayments resulting from adjustments of GWA's partnership items have expired for GWA's taxable years that ended before 2009.

Date: May 20, 2021

Robert E. Gendreau