OBH Tests

When the court applied the purpose prong to the OBH transactions, it expanded it to include three tests, how tenuous the relationship is between the indebtedness and the acquisition of the stock, the testimony of the taxpayer, and the government’s ability to rebut the taxpayer’s case.

In the first test, the court looked at three parts: if there was a significant amount of time between the dates of indebtedness, and the purchase of the stock; the number of transactions involved in each trace; finally, how arbitrary the allocation method has to be.  The first aspect looked at the time between the debt and the stock purchase.  Mr. Powell would trace the proceeds through multiple transactions, which could span up to a year’s worth of time.  This also argued against any purpose support since the events were not coincident or nearly coincident.  Similar to the first aspect, the traces would often go through dozens and even hundreds of transactions before purchasing the stock.  The final aspect looked at how arbitrary Mr. Powell had to be in order to determine the path the funds took.  Mr. Powell testified that his traces did not prove the funds were used to purchase the stocks, just that they could have been used to do so.  In all three parts, the relationship was found to be tenuous.   

In the second test, the court examined Mr. Buffett’s testimony.  Mr. Buffett testified that the debt was to increase and fortify the capital base.  Mr. Buffett would not deny that the indebtedness would be invested there were no plans at the time of acquisition.  While the proceeds of the debt could be used to purchase dividend stocks, the lack of a plan to do so, indicates that there was no intended purpose.  As the HEI case, the court looked to OBH’s intent, and specifically the intent of Mr. Buffett.  Since there was no predetermined plan to purchase dividend-paying stock, unless proven otherwise, the purpose prong is not satisfied.

In the third test, the court looked to the government’s argument and rebuttals.  The government made the argument that Berkshire intended to invest in equity securities.  Mr. Buffett did not dispute this; however, equity securities do not have to be dividend paying stocks.  Therefore, the court found the government’s argument lacking.  Finally, the government also offered no real rebuttal to any of the arguments presented by Berkshire, or the questions raised by the courts.