                                                             NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT
                                _____________

                                      No. 16-1674
                                     _____________

                       MICHAEL TSEYTIN; ELLA TSEYTIN,
                                                  Appellants

                                          v.

                    COMMISSIONER OF INTERNAL REVENUE
                              _____________

                        On Petition for Review of Order of the
                               United States Tax Court
                                  (T.C. No. 354-12)
                       Tax Court Judge: Hon. Stephen J. Swift
                                  ______________

                               Argued March 30, 2017
                                  ______________

           Before: VANASKIE, KRAUSE, and RESTREPO, Circuit Judges

                          (Opinion Filed: August 18, 2017)
                                 ______________

Frank Agostino, Esq.
Lawrence A. Sannicandro, Jr., Esq.      [ARGUED]
Agostino & Associates
14 Washington Place
The Bank House
Hackensack, NJ 07601

      Counsel for Appellants

David A. Hubbert, Acting Assistant Attorney General
Regina S. Moriarty, Esq.                [ARGUED]
Bridget M. Rowan, Esq.
United States Department of Justice
Tax Division
950 Pennsylvania Avenue, N.W.
P.O. Box 502
Washington, D.C. 20044

       Counsel for Appellee
                                      ______________

                                         OPINION*
                                      ______________

VANASKIE, Circuit Judge.

       This tax appeal raises the classic tax issue of form versus substance. Appellant

Michael Tseytin was the primary shareholder in a company that owned most of Russia’s

Pizza Huts and KFCs. To sell the company, he bought out his minority shareholder and

then transferred all the company’s shares—including what he just purchased—to the

buyer, an Eastern and Central European fast-food peer. In effect, the deal meant Tseytin

sold his majority stake and also acted as the go-between in the minority shareholder’s

sale of its shares. But the IRS took the formalities of the deal literally, and taxed Tseytin

on the gain attributable to all the shares, even the gain on the shares purchased from the

minority shareholder.

       Tseytin now argues he should not be taxed on stock he bought from the minority

shareholder because he never owned it and acted merely as an agent, and alternatively, if




       *
        This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7
does not constitute binding precedent.
                                              2
he must be taxed, he should be permitted to recognize losses. We find neither argument

meritorious because Tseytin must bear the tax consequences of his business decisions,

and Tseytin’s two blocks of stock must be analyzed as separate units to give content to

I.R.C. § 356. A limited remand, however, is warranted, because the parties agree that

Appellant Ella Tseytin—Michael’s wife—was held liable for her husband’s tax bill in

error. We will remand so that the error with respect to Ella may be corrected, but

otherwise affirm.

                                              I.

         This case centers on a two-company merger. The first company was Appellant

Michael Tseytin’s New Jersey corporation, U.S. Strategies, Inc. (“USSI”), whose

business involved owning and operating two Russian LLCs that in turn owned and

operated most of Russia’s KFC and Pizza Hut restaurants. Tseytin owned 75% of USSI’s

shares. The remaining 25% were owned by a company named Archer Consulting

Corporation.

         On the other side of the merger was AmRest Holdings, NV, a Netherlands

corporation also involved in the fast-food business. It owned KFCs, Pizza Huts, and

other fast-food restaurants in Eastern Europe, Central Europe, Germany, France, and

Spain.

         In May 2007, all the relevant players substantively agreed to the merger in two

separate written agreements. The first agreement was between Tseytin and Archer,

wherein Tseytin agreed to “purchase” for his “own account” Archer’s 25% stake in USSI.

(App. 123, 125.) At closing on June 14 at Archer’s offices in Moscow, Archer was to

                                              3
transfer the shares to Tseytin, and then at some time in the next month Tseytin would

make a “deferred” purchase payment to Archer, prior to July 31st. (App. 123.)

       The second agreement, the Merger Agreement, was signed by Tseytin, USSI, and

AmRest—but not Archer—and stated that at closing in Warsaw (1) Tseytin would ensure

that he was the “record” owner of 100% of the USSI stock, “free and clear of any

restrictions”; (2) Tseytin would transfer 100% of USSI’s shares to AmRest; and (3)

AmRest would transfer cash and AmRest stock to Tseytin as compensation. (App. 152.)

       The transaction went through as planned. On June 14, Tseytin and Archer closed

on their agreement and Archer transferred its USSI stock to Tseytin. On July 2, the

USSI-AmRest merger closed, and Tseytin transferred all the USSI stock to AmRest. On

July 3, AmRest sent Tseytin $23,099,420 in cash and $30,791,390 in AmRest stock, for a

total of nearly $54 million for all USSI shares. Then on July 5, Tseytin paid Archer $14

million for its 25% stake in USSI.

       In two tax filings for the 2007 tax year, Tseytin took two different approaches to

the transaction. In his original return, Tseytin reported tax liability of $3,780,522 and

paid that amount to the IRS. But in 2009 he amended his return and reported a lower

amount of liability, $2,577,182, and requested a refund for the difference. The

Commissioner audited Tseytin and found the original amount to be closer to correct. The

Commissioner denied Tseytin’s request for a refund and ordered Tseytin to pay $30,478

in back taxes and a $6,096 penalty. Tseytin then petitioned the Tax Court for a

redetermination. The Tax Court held for the Commissioner, and Tseytin timely appealed.



                                              4
                                             II.

       The Tax Court had jurisdiction pursuant to 26 U.S.C. (“I.R.C.”) § 6213 and

§ 7442. We have jurisdiction to review decisions of the Tax Court under I.R.C.

§ 7482(a)(1).   We review the Tax Court’s legal conclusions de novo and its factual

findings for clear error. Crispin v. Comm’r, 708 F.3d 507, 514 (3d Cir. 2013).

                                            III.

       Tseytin raises two main issues as to his tax liability: (1) whether he owes tax for

income he allegedly derived from Archer’s shares, and (2) whether his “losses” can be

subtracted from his overall gains.

                                             A.

       First, Tseytin challenges the Commissioner’s determination that he must pay tax

on the $14 million that he received from AmRest and remitted to Archer. The question is

whether the form of the transaction makes Tseytin liable for a gain on the 25% share of

USSI stock that had been held by Archer.

       “[W]hile a taxpayer is free to organize his affairs as he chooses, . . . once having

done so, he must accept the tax consequences of his choice, whether contemplated or not,

and may not enjoy the benefit of some other route he might have chosen to follow but did

not.” Comm’r v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974)

(citations omitted). A taxpayer who falls within the scope of this rule—the “Danielson

rule”—is stuck with the form of his business transaction, and can make an argument that

substance should prevail over that form only if a limited class of exceptions applies, for



                                              5
example, if the taxpayer was fraudulently induced into the deal, or there has been a

material breach. Comm’r v. Danielson, 378 F.2d 771, 775 (3d Cir. 1967) (en banc).

       Here, Tseytin argues he was never the substantive owner of the Archer block of

stock and therefore should not be taxed on the $14 million portion of AmRest’s payment

that he passed to Archer. But none of the Danielson exceptions apply—Tseytin does not

argue he was defrauded into the transaction, for example—and the contracts signed by

the parties state in explicit terms that Tseytin acquired ownership of Archer’s stock: he

“purchase[d]” it for his “own account” prior to selling it to AmRest, and even though the

shares were in his hands for only a brief period of time, he was the “record” owner, “free

and clear of any restrictions.” (App. 123, 125, 152.) These terms could hardly be clearer.

Under Danielson, that is the end of the matter; no exception applies, the general rule

governs, and Tseytin must bear the tax liability for owning all the USSI shares. Tseytin

could have hypothetically structured the deal so that he never acquired formal ownership

of Archer’s shares. But he did not, and may not benefit from an alternative route now.

       Tseytin puts forward four arguments in an attempt to escape this conclusion. First,

he believes his argument about substantive ownership falls outside the scope of the

Danielson rule because he is merely disputing how the contracts should be interpreted,

and is not seeking to recharacterize the form of the exchange. Tseytin is correct that

Danielson’s scope does not extend to a taxpayer’s challenge to the Commissioner’s

interpretation of a contract. Amerada Hess Corp. v. Comm’r, 517 F.2d 75, 85-86 (3d Cir.

1975). In Hess, for example, the Danielson rule did not prohibit a taxpayer from

challenging how a stock’s fair-market value should be calculated under the terms of a

                                             6
particular contract. Id. But even if Tseytin’s argument could be characterized as

involving contract interpretation, the contracts here are unambiguous: Tseytin bought

Archer’s stock for his own account, free and clear of any restrictions, and owned it prior

to the sale to AmRest.

       Second, Tseytin argues the Danielson rule should not apply because its

background policies are not implicated. According to Tseytin, the Danielson rule’s

purpose is to prevent a taxpayer from having her cake and eating it too: a taxpayer must

accept the bitter with the sweet and a deal’s tax consequences with its business benefits.

Tseytin sees this tax-fairness policy not implicated here because in his view he incurred

no benefit from serving as Archer and AmRest’s go-between—he never received any

cake at all. This argument has at least two fatal flaws. For one, Tseytin likely did

benefit. By structuring the merger so that he purchased Archer’s stock for his own

account prior to the sale to AmRest, Tseytin made the overall merger simpler by ensuring

that AmRest could deal with only one party. Greater simplicity likely reduced the deal’s

transaction costs and litigation risk, increased the likelihood of the deal actually closing,

and perhaps caused AmRest to pay a higher price than it otherwise may have. Second,

even if Tseytin is right that the Danielson rule’s background policies are not implicated

here, that is of no consequence, because rules must generally be enforced independently

of their underlying policies. That is after all the point of a bright-line rule like

Danielson’s: its clear-cut nature requires that judges enforce it without wading into

policy analysis, ensuring that the rule’s application will be easy and predictable. See

Kathleen M. Sullivan, The Supreme Court, 1991 Term—Foreword: The Justices of Rules

                                               7
and Standards, 106 Harv. L. Rev. 22, 58-59 (1992) (comparing the relative advantages

and disadvantages of bright-line rules and broader standards). Here, the Danielson rule’s

predictability would be eviscerated if we held, as Tseytin would have us hold, that its

application actually depends on background tax-fairness policies. That would turn

Danielson’s bright-line rule into something other than a bright-line rule. Tseytin also

argues the Hess case supports the proposition that the Danielson rule is already not

enforced when it diverges from its underlying purposes. That is not what the Hess case

held—as mentioned above, Hess did not purport to create new exceptions within

Danielson’s scope; it held that the Danielson rule does not “determine[] the appellants’

burdens” when the appellant “attack[s]” the Commissioner’s interpretation of particular

terms in a contract. Hess, 517 F.2d at 85-86, n.38.

       Third, Tseytin makes an agency argument: he was nothing more than Archer’s

agent in selling Archer’s block of stock, and agents are not liable for the tax burden of

their principals. An agency relationship is created through “manifestation by the

principal to the agent that the agent may act on his account” and the agent’s “consent” to

the undertaking. Restatement (Second) of Agency § 15 (Am. Law. Inst. 1958); cf.

Comm’r v. Bollinger, 485 U.S. 340, 349 (1988) (citing the Restatement as persuasive

authority for agency principles in a tax case). Here, Tseytin argues he and Archer had an

agency relationship whereby his undertaking was to transfer Archer’s shares to AmRest

and remit to Archer the $14 million payment. The problem is that the best available

evidence—the written agreement between Archer and Tseytin—strongly suggests there

was no agency relation. The agreement states in straightforward terms that Tseytin

                                             8
purchased Archer’s shares for his own account. A gaping silence in the agreement says

even more: the contract does not mention an agency relationship in form or substance,

and none of the terms suggest Tseytin ever had an obligation to sell his newly-acquired

shares to AmRest or anyone else; for all the contract cared, Tseytin could have kept the

stock for as long as he wanted, as long as he paid Archer its $14 million. Tseytin did of

course encumber himself with an obligation to sell the Archer shares, but that obligation

was to USSI and AmRest, not Archer, and arose out of the separate Merger Agreement to

which Archer was not a party. Tseytin’s response is that a principal-agent relationship

can be inferred by the parties’ conduct, and more specifically Archer and Tseytin’s

informal agreement, made prior to the enactment of the two written agreements, to sell

USSI through Tseytin. See Nat’l Carbide Corp. v. Comm’r, 336 U.S. 433, 436-38 (1949)

(examining the conduct of two companies, using six factors, to determine the existence of

a principal-agent relationship). But for us to rely on that pre-written-agreement conduct,

we would have to ignore the fact that Tseytin and Archer integrated their agreements.

Their written agreement, wholly lacking in any indication of an agency relation, states

that it is “the entire agreement” and “supersedes all prior and contemporaneous oral or

written agreements with regard to such subject matter.” (App. 126); see also Restatement

(Second) of Contracts § 209, cmt. a (Am. Law Inst. 1981) (“An integrated agreement

supersedes contrary prior statements”).

       Finally, Tseytin argues his case can be saved by New York contract law. In New

York, a party may rescind a contract if (a) the party was induced to participate by fraud,

or (b) there was a material breach. Strand Bldg. Corp. v. Russell & Saxe, Inc., 232

                                             9
N.Y.S.2d 384, 386 (N.Y. Super. Ct. 1962). Tseytin, however, cites this line of case law

to go much further, arguing that at the time Tseytin transferred Archer’s block of USSI

shares to AmRest, Archer could have still hypothetically tried to rescind its contract with

Tseytin, because Tseytin had not yet paid Archer the $14 million. Tseytin says this

possibility of rescission means he only ever held “bare legal title” to Archer’s shares, a

property interest insufficient to bear the burden of taxation on the $14 million portion of

AmRest’s payment. Keeping in mind that nothing in the record indicates that Archer had

a reason to justify a rescission, New York law does not go nearly as far as Tseytin would

like it to: nothing in the Strand case discusses the property interest a person in Tseytin’s

shoes holds in his stock, whether it be “bare legal title” or something else, and Strand

does not address any tax issues, federal or otherwise. The New York rescission issue is

little more than a red herring.

       In sum, Tseytin owned 100% of USSI’s shares when he sold the company to

AmRest for $54 million in aggregate compensation. He must shoulder the tax burden for

the entire payment—even the portion associated with the $14 million he remitted to

Archer.

                                             B.

       Tseytin next makes an argument in the alternative that if he must be taxed on the

full $54 million from AmRest, he should be permitted to subtract from his gains on his

original shares what he says he “lost” on the sale of the Archer shares.

       The Tax Code imposes a general rule prohibiting the recognition of gains and

losses incurred in a stock-for-stock corporate merger transaction. I.R.C. § 354(a); see

                                             10
also Comm’r v. Clark, 489 U.S. 726, 729 (1985) (stating the Tax Code “imposes no

current tax on certain stock-for-stock exchanges”). 1 But this general rule has an

exception for instances when a corporate reorganization involves a transfer of stock in

exchange for both stock and other property or money. I.R.C. § 356. In those

transactions, losses still fall within the scope of the general rule—they may not be

recognized—but gains must be recognized, unlike in the context of a typical stock-for-

stock transaction. Id. § 356(a), (c).2


       1
         Pertinent here is the general rule provided in I.R.C. § 354(a)(1): “No gain or loss
shall be recognized if stock or securities in a corporation a party to a reorganization are,
in pursuance of the plan or reorganization, exchanged solely for stock or securities in
such corporation or in another corporation a party to the reorganization.”
       2
           Section 356(a) states in pertinent part:

       Recognition of gain: If—

       (A) section 354 or 355 would apply to an exchange but for the fact that

       (B) the property received in the exchange consists not only of property
       permitted by section 354 or 355 to be received without the recognition of
       gain but also of other property or money,

       then the gain, if any, to the recipient shall be recognized, but in an amount
       not in excess of the sum of such money and the fair market value of such
       other property.

I.R.C. § 356(a)(1).

       Section 356(c) states,

       Loss: If—

       (1) section 354 would apply to an exchange or section 355 would apply to
       an exchange or distribution, but for the fact that

                                                11
       To give content to § 354 and § 356, the Commissioner analyzes multifaceted

transactions according to their separate units, so that a taxpayer may not end-run the no-

recognition-of-losses rule by tucking one unit’s unrecognizable loss under the

transaction’s broader recognizable gain. For example, in Lakeside Irrigation Co. v.

Commissioner, an irrigation company sold four blocks of stock in return for certain

business debts being forgiven. 128 F.2d 418, 418 (5th Cir. 1942). The company realized

gains on two of the blocks of stock, losses on the other two, and an overall gain when all

of the gains and losses on the four blocks were netted. Id. at 419. This four-block sale

raised the specter of a statute similar to § 356(c) that would require recognition of the two

gains and prohibit recognition of the two losses. The company attempted to avoid the

non-recognition problem by characterizing the four-block transfer as one big exchange,

thereby allowing the company to subtract the two-block loss from the larger two-block

gain and report to the IRS one smaller gain. Id. The Commissioner, the Tax Court’s

predecessor, and the Fifth Circuit all found this arrangement impermissible, holding that

when a transaction involves “separate unit[s]” each unit must be analyzed separately. Id.

       Here, Tseytin tries to do what Lakeside prohibits. He asks the Court to treat the

two blocks of USSI stock—his block and Archer’s—as one unit, sold in one exchange. If




       (2) the property received in the exchange or distribution consists not only of
       property permitted by section 354 or 355 to be received without the
       recognition of gain or loss, but also of other property or money,

       then no loss from the exchange or distribution shall be recognized.

I.R.C. § 356(c).
                                             12
we did so, Tseytin believes he could subtract a loss of more than $500,000 on the Archer

shares from a gain of more than $17 million on his original shares. The Commissioner

disputes whether Tseytin’s math is correct, 3 but even assuming it is, at least two

undisputed factors support the Tax Court’s finding that Tseytin’s USSI stock holdings

were composed of two units: Tseytin acquired one block of USSI stock approximately

three years before the second block, and he held a vastly different basis in the two blocks.

Given that the blocks are indeed separate, § 356 prohibits recognition of any loss in the

Archer block, as the Tax Court correctly held.

       Tseytin argues we should depart from Lakeside’s rule at least in cases like this

one, where a taxpayer seeks to recognize only a small loss alongside a much larger gain.

That argument has been twice considered and rejected, or at least deferred, by the

Department of the Treasury. The Department issued notices of proposed rulemaking in

2006 and 2009 stating that it was considering the issue and soliciting comments on the

matter. 74 Fed. Reg. 3509, 3509-3511 (Jan. 21, 2009); 71 Fed. Reg. 4264, 4266 (Jan. 26,

2006). Neither of those notices were followed by the promulgation of a rule or any other

agency action. Also, neither of the notices provide an argument or explanation (or even a

recitation of someone else’s argument or explanation) as to why what Tseytin proposes

could be advantageous. From our perspective, Lakeside’s approach is better: separate


       3
          Indeed, according to the Commissioner Tseytin's netting argument would hurt
him rather than help. The I.R.S. found Tseytin liable for a $17.3 million gain, but under
the Commissioner's math netting the Archer shares with Tseytin's original shares would
result in a much higher gain of more than $23.1 million, not the $16.8 million that
Tseytin claims. We need not decide whose calculation is correct, however, because a
netting approach is not available here.
                                             13
units must be treated separately to prevent § 356’s exception from swallowing § 354(a)’s

rule. Perhaps a later case or agency rule will further explore what it means for an

exchange to be composed of “separate” units. But given the current landscape, the Tax

Court did not err with regard to the loss-recognition issue.

                                            IV.

       One final matter remains: Michael Tseytin’s wife, Ella Tseytin, is also an

appellant and a party to this appeal. Both the Commissioner and the Appellants agree

that she was inadvertently and erroneously held liable in the Tax Court for her husband’s

tax deficiencies. We will remand the case to the Tax Court to provide it an opportunity to

address the issue.

                                             V.

       The Tax Court’s decision was correct, and we will therefore affirm with a limited

remand on the issue of Appellant Ella Tseytin’s liability.




                                             14
