Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca13-16-01718/USCOURTS-ca13-16-01718-0/pdf.json

Parties Involved:
Russian Recovery Fund Limited
Appellant
United States
Appellee

Document Text:

United States Court of Appeals 

for the Federal Circuit ______________________ 

RUSSIAN RECOVERY FUND LIMITED,

Plaintiff-Appellant

v.

UNITED STATES,

Defendant-Appellee

______________________ 

2016-1718, 2016-1719

______________________ 

Appeals from the United States Court of Federal 

Claims in Nos. 1:06-cv-00030-EGB, 1:06-cv-00035-EGB, 

Senior Judge Eric G. Bruggink.

______________________ 

Decided: March 14, 2017

______________________ 

DOUGLAS HALLWARD-DRIEMEIER, Ropes & Gray LLP, 

Washington, DC, argued for plaintiff-appellant. Also 

represented by COURTNEY M. COX, JUSTIN FLORENCE, 

KATHLEEN SAUNDERS GREGOR, LORETTA R. RICHARD, 

Boston, MA; BRITTANY CVETANOVICH, Chicago, IL.

ANDREW M. WEINER, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by RICHARD FARBER, 

GILBERT STEVEN ROTHENBERG, CAROLINE D. CIRAOLO, 

DIANA L. ERBSEN. 

______________________ 

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2 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

Before O’MALLEY, BRYSON, and WALLACH, Circuit Judges.

WALLACH, Circuit Judge. 

Appellant Russian Recovery Fund Limited (“RRF”), 

acting through its tax matters partners Russian Recovery 

Advisers, L.L.C. (“RRA”) and Bracebridge Capital, L.L.C. 

(“Bracebridge”), sued the United States (“the Government”) in the U.S. Court of Federal Claims, seeking 

readjustment of partnership items pursuant to the Tax 

Equity and Fiscal Responsibility Act (“TEFRA”), I.R.C.

§§ 6221–6233 (2000). RRF alleges that the Internal 

Revenue Service’s (“the IRS”) October 14, 2005 Notice of 

Final Partnership Administrative Adjustment (“2005 

FPAA”) improperly disallowed approximately $50 million 

of losses that RRF had claimed for fiscal year 2000 and 

imposed a 40% penalty on any underpayment. The parties filed cross-motions for summary judgment on timeliness grounds, and the Court of Federal Claims held that 

the limitations period for assessing taxes against RRF’s 

indirect partners had expired as to some, but not all,

indirect partners. See Russian Recovery Fund Ltd. v. 

United States (RRF I), 101 Fed. Cl. 498, 510–11 (2011)

(granting-in-part and denying-in-part the parties’ motions 

for summary judgment). Following trial on the claims not 

resolved at summary judgment, the Court of Federal 

Claims entered judgment for the Government, sustaining

the IRS’s disallowance of the losses and imposition of 

penalties. See Russian Recovery Fund Ltd. v. United 

States (RRF II), 122 Fed. Cl. 600, 601–02 (2015). 

RRF appeals. We have jurisdiction pursuant to 28 

U.S.C. § 1295(a)(3) (2012). We affirm.

BACKGROUND

The Court of Federal Claims’s factual findings are extensive and clearly presented. See RRF II, 122 Fed. Cl. at 

602–14; RRF I, 101 Fed. Cl. at 500–01. Because these 

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RUSSIAN RECOVERY FUND LTD. v. UNITED STATES 3

factual findings are largely undisputed, we recite only 

those facts necessary to resolve this appeal.

There are several players of interest. Nancy Zimmerman co-founded Bracebridge, a management company. RRF II, 122 Fed. Cl. at 602. Bracebridge created 

RRF, a hedge fund. Id. Bracebridge also manages FFIP, 

L.P. (“FFIP”), another fund. Id. All three—Bracebridge, 

RRF, and FFIP—are partnerships. RRF I, 101 Fed. Cl. at 

500. Relevant to this appeal, Ms. Zimmerman is a direct 

partner of FFIP, and FFIP is a direct partner of RRF. Id. 

In this context, Ms. Zimmerman is an indirect partner of 

RRF and represents similarly situated indirect partners 

of RRF (direct partners of FFIP). Id.

In 1998, Russian sovereign debt was traded exclusively on the Moscow Interbank Currency Exchange 

(“MICEX”). RRF II, 122 Fed. Cl. at 603–04. Non-Russian 

investors could not invest directly in Russian sovereign 

debt on the MICEX; however, they could invest in derivative instruments known as credit-linked notes (“CLNs”) 

sold by certain authorized banks. Id. at 603. When 

Russia defaulted on its sovereign debt in August 1998, the 

Russian ruble collapsed, and CLNs lost nearly all of their 

value. Id. These assets also became extremely illiquid: 

the Russian Central Bank imposed currency exchange 

limitations that prevented the ruble from being freely 

traded, and the Russian government only allowed the 

authorized banks to access the debt and trade in rubles. 

Id.

These events had serious consequences for Tiger 

Management, LLC (“Tiger”), one of the world’s largest 

managers of hedge funds. Id. at 604. Two of Tiger’s 

funds, foreign partnerships that do not pay U.S. taxes, 

had purchased CLNs through Deutsche Bank for more 

than $230 million. Id. After the collapse, those CLNs 

were worth less than 10% of their original value. Id. And 

Tiger overall was in bad straits: in 1998, Tiger managed 

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4 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

$22 billion; but by 2000, that amount had dropped to $6 

billion as a result of heavy losses in Russian debt, Asian 

debt, and an investment in US Airways. Id. at 613. 

During that period, Tiger needed cash to redeem the 

shares of investors who wanted out, but the capital controls on Russian debt hampered Tiger’s ability to sell its 

devalued CLNs. Id.; see id. at 604 & n.9.

Ms. Zimmerman “believed that she could make money 

for herself and investors by obtaining devalued Russian 

debt at pennies on the dollar in anticipation of a recovery 

of the ruble and hence something approaching face value 

of debt instruments.” Id. at 603. As a result, Bracebridge 

established RRF and sought holders of Russian securities 

to contribute CLNs or cash in exchange for shares of RRF. 

Id. at 603−04; see J.A. 1758. Bracebridge also established 

RRA, a separate management company to advise RRF 

and collect management fees. RRF II, 122 Fed. Cl. at 602.

Despite earnest marketing efforts by Bracebridge during the first several months, RRF largely failed to obtain 

investors and still had no assets in March 1999. Id. at 

605. An internal Bracebridge email on March 9, 1999 

discussed a potential contribution of CLNs from an entity 

through Deutsche Bank. Id. Given concern that RRF 

needed partners to attract the potential investor, the 

email proposed having Bracebridge-controlled entities 

become RRF partners. Id. A telephone list circulated the 

next day contained the contact information of players 

from Bracebridge, Deutsche Bank, and Tiger. Id.

In April 1999, FFIP “contribute[d] the first assets to 

RRF.” Id.; see id. at 602. Then, on April 30, 1999, Bracebridge’s James DiBiase emailed Ms. Zimmerman about 

the “need[]” to represent that a “high” percentage “of RRF 

(i.e., FFIP) is owned by individuals” to attract Deutsche 

Bank’s investors. Id. at 606 (internal quotation marks 

and citation omitted). In a second email on May 14, 1999, 

he advised Ms. Zimmerman that RRF should not allow 

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RUSSIAN RECOVERY FUND LTD. v. UNITED STATES 5

corporations to join because “it could possibly impair one 

of our most valuable assets,” i.e., “the built-in losses in 

Russian depreciated assets that might end up in RRF.” 

Id. (internal quotation marks and citation omitted). As 

explained in a later email by Mr. DiBiase, the presence of 

corporations could preclude later resale “since people 

interested in buying tax losses don’t want to transact with 

corporations.” Id. (internal quotation marks and citation 

omitted).

A series of transactions followed, each of which was 

orchestrated by Deutsche Bank. Id. at 604, 620. First, in 

late May 1999, RRF’s first two substantial outside investors—both funds operated by Tiger—transferred CLNs to 

RRF in exchange for an ownership interest in RRF. Id. at 

607. Prior to investing, however, Tiger requested certain 

changes to the “standard RRF offering memorandum” and 

refused to execute the standard subscription agreement 

representing that “the Shares subscribed for hereby are 

being acquired by the undersigned for investment purposes only, for the account of the undersigned[,] and not with 

a view to any sale or distribution thereof.” Id. (paraphrasing J.A. 8178); see J.A. 5898–99. In response, RRF 

reduced the three-year lock-up period to “allow[] Tiger to 

redeem its shares on or after July 1, 1999, in exchange for 

cash or assets ‘in kind,’” and excluded the representation 

that Tiger was purchasing the shares “for investment 

purposes only” from the subscription agreement. RRF II, 

122 Fed. Cl. at 607; see J.A. 8853, 8900, 8945–48. Second, 

on June 3, 1999 (i.e., approximately two weeks after the 

first transaction between RRF and Tiger), “Tiger sold all 

of its RRF partnership shares to FFIP” for approximately 

$14.1 million, a discount of $800,000. RRF II, 122 Fed. 

Cl. at 609; see J.A. 9069. Notably, during the two weeks

between Tiger’s acquisition of its ownership interest in 

RRF and its sale of that interest to FFIP, the value of the 

shares had in fact increased. RRF II, 122 Fed. Cl. at 609. 

And a fax from Deutsche Bank to Mr. DiBiase during this 

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6 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

period makes clear that “it was RRF, not Tiger, that 

would have had an interest in an entity like FFIP purchasing [Tiger’s] shares” and acquiring the built-in losses. 

Id. at 608. Third, on June 22, 1999, RRF sold 77.18% of 

the Tiger CLNs to General Cigar Corporation (“General 

Cigar”) for cash and shares. Id. at 609; see J.A. 4992–95. 

Finally, in 2000, RRF sold the remaining 22.82% of the 

Tiger CLNs on the open market. RRF II, 122 Fed. Cl. at 

609–10. 

Following these transactions, Mr. DiBiase began 

working with Ernst & Young to “provide[] the documents 

and facts that would collectively lay the foundation upon 

which the accountants would prepare RRF’s [tax] returns.” Id. at 622. On August 14, 2001, RRF filed its 

2000 tax return, allocating a loss to FFIP, which included 

a loss of $49,786,826 from the sale of the 22.82% of the 

Tiger CLNs. Id. at 609−10; RRF I, 101 Fed. Cl. at 500; see 

J.A. 1621–23, 9496.1 FFIP then reported losses for the 

2000 and 2001 tax years, much of which were attributable 

to the loss claimed by RRF in 2000. RRF I, 101 Fed. Cl. 

at 500. FFIP’s 2001 losses flowed through FFIP to Ms. 

Zimmerman, who filed her 2001 individual tax return on 

October 15, 2002. Id. On her 2001 individual tax return, 

Ms. Zimmerman reported a “substantial amount” of RRF’s 

loss. Id. “In other words, the bulk of the losses RRF 

allocated to FFIP in 2000 were not passed through in 

2000, but were retained by FFIP until 2001, at which 

point the losses impacted Ms. Zimmerman’s 2001 return.” 

Id. 

In 2005, the IRS performed an audit of FFIP’s 2001 

partnership return, which ultimately resulted in the 

1 RRF claimed the balance of the Tiger built in losses—approximately $171 million—on its 2004 return upon 

redeeming its preferred stock in General Cigar in 2004. 

RRF II, 122 Fed. Cl. at 610.

 

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issuance of a “no adjustments letter” to FFIP. Id. at 501; 

see J.A. 201. However, in October 2005, the IRS issued 

the 2005 FPAA to RRF for its 2000 tax year, which disallowed the loss RRF claimed for the sale of the Tiger CLNs 

and imposed a 40% penalty. RRF I, 101 Fed. Cl. at 501; 

RRF II, 122 Fed. Cl. at 621. 

DISCUSSION

RRF argues that the Court of Federal Claims erred by 

(1) denying its cross-motion for summary judgment in 

RRF I because “the proposed assessments were timebarred,” Appellant’s Br. 22 (capitalization omitted); 

(2) “holding that Tiger’s contributions to RRF were not 

valid partnership contributions,” id. at 33 (capitalization 

modified); and (3) “upholding a massive penalty based on 

its new partnership requirements,” id. at 55 (capitalization omitted). After articulating the relevant standard of 

review, we address these arguments in turn.

I. Standard of Review

The present appeal involves factual findings and legal 

conclusions reached on summary judgment and following 

trial. “We review the Court of Federal Claims’[s] grant of 

summary judgment under a de novo standard of review, 

with justifiable factual inferences being drawn in favor of 

the party opposing summary judgment.” Winstar Corp. v. 

United States, 64 F.3d 1531, 1539 (Fed. Cir. 1995) (en 

banc) (citation omitted), aff’d, 518 U.S. 839 (1996). In 

appeals following a trial, we review the Court of Federal 

Claims’s legal conclusions de novo and its factual findings 

for clear error. See John R. Sand & Gravel Co. v. United 

States, 457 F.3d 1345, 1353 (Fed. Cir. 2006). 

The present appeal also raises issues of statutory and 

regulatory construction, the characterization of transactions for tax purposes, and the reasonable cause exception 

to tax penalties. “We . . . review questions of statutory 

and regulatory construction without deference.” SRA 

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8 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

Int’l, Inc. v. United States, 766 F.3d 1409, 1412 (Fed. Cir. 

2014). “We review the characterization of transactions for 

tax purposes de novo, based on underlying findings of 

fact, which we review for clear error.” Wells Fargo & Co. 

v. United States, 641 F.3d 1319, 1325 (Fed. Cir. 2011) 

(citation omitted). Finally, as to the reasonable cause 

exception to tax penalties, “[w]hether the elements that 

constitute reasonable cause are present in a given situation is a question of fact, but what elements must be 

present to constitute reasonable cause is a question of 

law.” United States v. Boyle, 469 U.S. 241, 249 n.8 (1985) 

(internal quotation marks and citations omitted). 

II. The Court of Federal Claims Did Not Err by Denying 

RRF’s Cross-Motion for Summary Judgment in RRF I

In RRF I, the parties filed cross-motions for summary 

judgment disputing whether the IRS timely issued the 

2005 FPAA and whether it suspended the limitations 

period for adjustment and assessment of RRF’s indirect 

partners’ (FFIP’s direct partners’) individual tax returns. 

101 Fed. Cl. at 499. With the agreement of the parties, 

the Court of Federal Claims selected Ms. Zimmerman as 

representative of the RRF indirect partners (who also are 

FFIP direct partners) whose tax returns were filed less 

than three years prior to the issuance of the 2005 FPAA. 

Id. at 499, 504. The Court of Federal Claims determined 

that “if it is demonstrated that the loss[] from RRF’s 2000 

tax return can be traced to Ms. Zimmerman’s 2001 tax 

return then [the IRS] may assess additional taxes.” Id. at 

509. It then “h[e]ld that the [2005] FPAA . . . validly 

suspended the limitation[s] period for assessing Ms. 

Zimmerman’s 2001 individual tax return.” Id. 

On appeal, RRF argues that “[a]ny attempt by the 

IRS to collect tax from FFIP partners in 2001 and later 

years based on FFIP partnership items is time-barred 

because the IRS failed to issue an FPAA to FFIP for those 

years.” Appellant’s Br. 22. According to RRF, the 2005 

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FPAA “toll[ed] the period for assessing tax ‘attributable 

to’ RRF’s 2000 partnership items, not FFIP’s 2001 partnership items,” id. at 23 (capitalization modified), because 

the 2005 FPAA cannot apply to either two partnerships 

(i.e., RRF and FFIP) or two tax years (i.e., 2000 and 

2001), see id. at 24–32. We hold the Court of Federal 

Claims correctly determined that the losses claimed on 

Ms. Zimmerman’s 2001 tax return are “attributable to” 

the loss claimed in RRF’s 2000 tax return, the limitations 

period for which was suspended by the 2005 FPAA. 

A. Legal Framework 

Pursuant to the TEFRA, the “[g]eneral rule” is that 

“the period for assessing any tax imposed by subtitle A 

[i.e., income tax] with respect to any person which is 

attributable to any partnership item (or affected item) for 

a partnership taxable year shall not expire before the date 

which is [three] years after the later of” either filing of the 

partnership’s return or the return’s due date. I.R.C. 

§ 6229(a) (emphases added). If an FPAA “with respect to 

any taxable year is mailed to the tax matters partner,” 

the limitations period in § 6229(a) “shall be suspended—

(1) for the period during which an action may be brought 

under [§] 6226 (and, if a petition is filed under [§] 6226 

with respect to such administrative adjustment, until the 

decision of the court becomes final), and (2) for [one] year 

thereafter.” Id. § 6229(d). Taken together, I.R.C. 

§ 6229(a) and (d) provide that the issuance of an FPAA for 

a given year “suspend[s]” the limitations period for assessing “any tax” of “any person” that is “attributable to” 

“any partnership item” for that year.

B. “Attributable to” Means Due to, Caused by, 

or Generated By

The central issue here is whether the losses that FFIP 

allocated in 2001 to Ms. Zimmerman were “attributable 

to” the loss reported by RRF in 2000 under § 6229(a). 

This is a question of statutory interpretation and, thus, 

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10 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

“our inquiry begins with the statutory text.” BedRoc Ltd., 

LLC v. United States, 541 U.S. 176, 183 (2004) (citations 

omitted). “The plain meaning of legislation should be 

conclusive, except in the rare cases in which the literal 

application of a statute will produce a result demonstrably at odds with the intentions of its drafters.” United 

States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 (1989) 

(internal quotation marks, brackets, and citation omitted). When interpreting another provision of the Internal 

Revenue Code, we explained that “attributable to” “is not 

defined anywhere in the [Internal Revenue] Code and has 

no special technical meaning under the tax laws.” Electrolux Holdings, Inc. v. United States, 491 F.3d 1327, 

1330 (Fed. Cir. 2007) (citation omitted). We noted that, in 

tax cases, various other courts “have construed the phrase 

according to its plain meaning, which is understood to be 

‘due to, caused by, or generated by.’” Id. at 1330–31 

(citations omitted) (collecting cases); see Keener v. United 

States, 551 F.3d 1358, 1365 (Fed. Cir. 2009) (same). 

Other principles of statutory construction reinforce 

this interpretation. First, “term[s] should be construed, if 

possible, to give [them] a consistent meaning throughout” 

the relevant statutory scheme. Gustafson v. Alloyd Co., 

513 U.S. 561, 568 (1995). Interpreting “attributable to” in

§ 6229(a) differently from how it is interpreted in other 

Internal Revenue Code provisions, i.e., “due to, caused by, 

or generated by,” would violate this principle. Second, 

“limitations statutes barring the collection of taxes otherwise due and unpaid are strictly construed in favor of the 

Government.” Badaracco v. Comm’r, 464 U.S. 386, 392 

(1984) (internal quotation marks and citation omitted); 

see Bufferd v. Comm’r, 506 U.S. 523, 527 n.6 (1993) (stating that, even where the statute of limitations for assessments is ambiguous, if “the Commissioner’s 

construction . . . is a reasonable one . . . [courts] should 

accept it absent convincing grounds for rejecting it”). As 

such, § 6229(a) should be interpreted broadly and the 

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RUSSIAN RECOVERY FUND LTD. v. UNITED STATES 11

IRS’s interpretation, if reasonable, should be given deference. Defining “attributable to” in § 6229(a) to mean “due 

to, caused by, or generated by” preserves the phrase’s 

plain meaning, maintains consistency with the phrase’s 

interpretation elsewhere in the Internal Revenue Code, 

and follows the Supreme Court’s precedent for affording 

the IRS deference in interpreting the Internal Revenue 

Code. Therefore, we see no reason why that same definition should not apply here. 

C. The Court of Federal Claims Did Not Err in Determining that the Losses Claimed on Ms. Zimmerman’s 2001 

Individual Tax Return Are “Attributable to” the Loss 

Claimed on RRF’s 2000 Tax Return

Applying that definition of “attributable to” here, the 

2005 FPAA suspended the limitations period for assessing 

any tax against Ms. Zimmerman that was “due to, caused 

by, or generated by” any partnership item on her 2001 

individual tax return. The parties do not dispute that the 

IRS issued the 2005 FPAA to RRF less than three years 

after Ms. Zimmerman filed her 2001 individual tax return. RRF I, 101 Fed. Cl. at 500; see J.A. 151. And, as 

explained above, RRF allocated the loss claimed in its 

2000 tax return to FFIP, much of which FFIP passed 

through in its 2000 and 2001 tax returns to Ms. Zimmerman, who claimed these losses in her 2001 individual tax 

return. RRF I, 101 Fed. Cl. at 500. Thus, the losses Ms. 

Zimmerman claimed on her 2001 tax return were “generated by” the loss claimed on RRF’s 2000 tax return, and

the 2005 FPAA suspended the limitations period for 

assessing taxes on these losses.

This interpretation of “attributable to” also comports 

with the Internal Revenue Code’s reasonable policy of 

treating partnership items at their source. Generally, 

“the tax treatment of any partnership item (and the 

applicability of any penalty, addition to tax, or additional 

amount which relates to an adjustment to a partnership 

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item) shall be determined at the partnership level.” I.R.C. 

§ 6221. Pursuant to this principle, the tax liability of an 

indirect partner2 depends upon the partnership items, 

and “[a]ll adjustments required to apply the results of a 

proceeding with respect to a partnership . . . to an indirect 

partner shall be treated as computational adjustments.” 

I.R.C. § 6231(a)(6); see Sente Inv. Club P’ship v. Comm’r, 

95 T.C. 243, 249 (1990) (applying § 6231(a)(6)). Computational adjustments are “change[s] in the tax liability of a 

partner which properly reflects the treatment . . . of a 

partnership item.” I.R.C. § 6231(a)(6) (emphasis added). 

The IRS’s actions here fall squarely within the definition 

of a computational adjustment because the IRS 

“change[d] . . . the tax liability of one [indirect] partner,” 

i.e., Ms. Zimmerman, “to properly reflect[] the treatment . . . of a partnership item,” i.e., the loss claimed in 

RRF’s 2000 tax return. Id. As a result, the IRS properly 

adjusted the partnership item at its source.3

2 An indirect partner is “a person holding an interest in a partnership through [one] or more pass-thru 

partners,” I.R.C. § 6231(a)(10), and a pass-thru partner is 

“a partnership . . . or other similar person through whom 

other persons hold an interest in [another] partnership,”

id. § 6231(a)(9). The Court of Federal Claims explained 

that FFIP is a direct partner of RRF and that Ms. Zimmerman is a direct partner of FFIP and an indirect partner of RRF. RRF I, 101 Fed. Cl. at 500. 

3 RRF concedes that if FFIP had simply passed 

through all of RRF’s loss in 2000, the losses reported by 

the indirect partners would be “attributable to” RRF’s 

loss. Appellant’s Br. 28 n.7. RRF’s position founders on 

the shoals of that concession. In Sente, the IRS issued an 

FPAA to a pass-thru partner rather than to the partnership that was the source of the reported losses. See 95 

T.C. at 245. The Tax Court determined that it lacked 

 

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D. RRF’s Counterarguments Are Unpersuasive

RRF presents two counterarguments, neither of which 

is persuasive. First, RRF argues that “an item can only 

be a partnership item of a single partnership.” Appellant’s Br. 25. According to RRF, “the [G]overnment 

conceded that the assessment at issue was attributable to 

‘a 2001 FFIP partnership item.’” Id. (quoting J.A. 973).4 

RRF contends that “the partnership item at issue is, and 

can be, a partnership item of FFIP and only FFIP.” Id. 

In support, RRF avers that permitting a “partnership 

item” to be attributable to multiple partnerships would 

disregard Congress’s intent “‘to simplify the procedures’ 

for partnership tax proceedings.” Id. (brackets omitted) 

(quoting Transpac Drilling Venture v. United States, 16 

jurisdiction, requiring that the flow-through losses be 

addressed in proceedings directed at the source partnerships instead of the pass-thru partner. Id. at 248. Here, 

the IRS issued the 2005 FPAA to RRF (the source partnership), not FFIP (the pass-thru partner), as required by 

Sente. See RRF II, 122 Fed. Cl. at 621. The only evidence 

that RRF has identified to demonstrate that FFIP’s role 

was materially different from the pass-thru partner’s role 

in Sente is that FFIP carried over some of the 2000 RRF 

loss to 2001. However, that action changed the year of 

the pass through, not the character of the losses, which 

are still “attributable to” the 2000 RRF loss. 4 The Government, however, did not state that the 

Tiger losses are a 2001 FFIP partnership item and, more 

importantly, did not state that Ms. Zimmerman’s underpayment was “attributable to” a 2001 FFIP partnership 

item. See J.A. 973 (the Government clarifying that the 

losses are a 2000 RRF partnership item and a 2001 “affected partnership item”); compare I.R.C. § 6231(a)(3) 

(defining “partnership item”), with id. § 6231(a)(5) (defining “affected item”).

 

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F.3d 383, 387 (Fed. Cir. 1994)). Vague references to the 

objective of simplifying partnership tax proceedings are 

insufficient to demonstrate that the plain meaning of 

“attributable to” “will produce a result demonstrably at 

odds with the intentions of its drafters,” and, thus, the 

plain language is “conclusive.” Ron Pair Enters., 489 U.S. 

at 242. 

Second, RRF contends that our interpretation of 

§ 6229 would “violate[] the tax system’s bedrock annual 

accounting principle,” i.e., that “taxes are to be determined on an annual basis.” Appellant’s Br. 29 (citing 

Burnet v. Sanford & Brooks Co., 282 U.S. 359, 364–65 

(1931)). Specifically, RRF alleges that our interpretation 

ignores the Supreme Court’s instruction that, “[a]bsent 

other specific directions from Congress, [Internal Revenue] Code provisions must be interpreted so as to conform 

to the basic premise of annual tax accounting.” Comm’r v. 

Gordon, 391 U.S. 83, 96 (1968) (footnote omitted); see 

Appellant’s Br. 30. The annual tax accounting principle 

concerns the annual calculation of tax liabilities based on 

receipts and deductions, not the limitations period to 

assess a tax. See United States v. Skelly Oil Co., 394 U.S. 

678, 680–81 (1969) (explaining the procedures for calculating annual tax liabilities under the annual accounting

principle). Indeed, “it is well settled that the IRS and the 

courts may recompute taxable income in a closed year in 

order to determine the tax liability in an open year.” 

Barenholtz v. United States, 784 F.2d 375, 380–81 (Fed. 

Cir. 1986) (footnote omitted). That is precisely what has 

occurred here—the IRS’s disallowance of the loss claimed 

on RRF’s 2000 tax return will result in Ms. Zimmerman 

owing tax for losses claimed in her individual tax returns 

for 2001 and any later years in which she claimed losses 

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RUSSIAN RECOVERY FUND LTD. v. UNITED STATES 15

attributable to the 2000 RRF loss, whether she or FFIP 

carried them over.5 

III. The Court of Federal Claims Did Not Err in Determining that Tiger Was Never a Bona Fide Partner in RRF

In RRF II, the Court of Federal Claims concluded that 

“Tiger had no real intention of becoming a partner in 

RRF[] and that RRF had reason to know that.” 122 Fed. 

Cl. at 617. Instead, the Court of Federal Claims found 

“[a] review of the evidence demonstrates that . . . their 

transaction was a sham, that the transaction lacked 

economic substance, that the contribution can be ignored, 

and that the transaction should be characterized as a 

sale.” Id. RRF argues that the Court of Federal Claims 

erred by dismissing the relevant provisions of the Internal 

Revenue Code, focusing on Tiger’s subjective intent rather 

than objective indicia, and ignoring precedent permitting 

parties to structure transactions to achieve tax advantages. Appellant’s Br. 33; see id. at 33−55. Because 

there was no bona fide partnership between RRF and 

Tiger, we hold that the Court of Federal Claims did not 

err.

5 RRF also contends that the Court of Federal 

Claims improperly “traced” the losses “back through to 

items from different partnerships,” contrary to “Electrolux’s instruction to focus on the direct cause, i.e., the 

partnership item.” Appellant’s Br. 27. However, in 

Electrolux, we found that the carryover to 1995 was 

“attributable to” the 1994 capital loss, which was the 

“original source,” 491 F.3d at 1331; it was not “attributable to” the 1993 carryback, which was an intermediate 

step rather than the “direct[] cause” of the 1995 carryover, 

id. at 1332. Similarly, Ms. Zimmerman’s 2001 losses are 

“attributable to” the original 2000 RRF loss, not the 

intermediate carryover by FFIP.

 

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16 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

A. RRF and Tiger Did Not Intend to Form 

a Bona Fide Partnership

1. The Legal Framework

When a party acquires an economic interest in a partnership, they are only treated as a partner for tax purposes if the partnership “interest is acquired in a bona fide 

transaction, not a mere sham for tax avoidance or evasion 

purposes.” Treas. Reg. § 1.704-1(e)(1)(iii) (2015). In 

determining whether a bona fide partnership exists, the 

Supreme Court requires that courts evaluate “whether 

the partners really and truly intended to join together for 

the purpose of carrying on the business and sharing in the 

profits and losses or both.” Comm’r v. Culbertson, 337 

U.S. 733, 741 (1949) (internal quotation marks and citation omitted). More specifically, the Supreme Court 

explained that

[t]he question is not whether the services or capital contributed by a partner are of sufficient importance to meet some objective standard . . . , but 

whether, considering all facts— . . . [including] 

any . . . facts throwing light on their true intent—

the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise. 

Id. at 742 (emphases added) (footnote omitted). Contrary 

to RRF’s repeated assertions, the focus of the Culbertson

test is “not . . . objective”; it is the parties’ “true intent.” 

Id. The parties’ “true intent” is evaluated by “considering 

all facts,” id., and “[t]riers of fact [who] are constantly 

called upon to determine the intent with which a person 

acted” are best able to make these determinations, id. at 

743 (footnote omitted). 

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2. The Court of Federal Claims Did Not Err in its Factual 

Findings as to RRF’s and Tiger’s Intent

The Court of Federal Claims “consider[ed] all facts,” 

id., and determined that it was “clear” that “Tiger had no 

real intention of becoming a partner in RRF[] and that 

RRF had reason to know that,” RRF II, 122 Fed. Cl. at 

617 (emphasis added). But the court did not merely find 

that RRF “had reason to know” that Tiger intended a sale, 

not a partnership. The court also found that, as early as 

April 1999, Tiger’s contribution was “part of a plan (of 

which [RRF principals] were fully aware) to move highly 

depreciated assets to RRF via Deutsche Bank in a way 

that preserved their tax characteristics.” Id. at 621. In 

other words, both players knew before the first transaction that Tiger would sell its CLNs for cash and that RRF 

would obtain CLNs with massive built-in losses. As the 

court stated, “Tiger and RRF thus collaborated in a 

scheme to use the tax laws to their advantage.” Id. We 

discern no clear error in these findings by the Court of 

Federal Claims. 

Indeed, the Court of Federal Claims’s factual findings 

are thorough, established by the record, and supportive of 

its conclusion that RRF and Tiger did not form a bona fide 

partnership. For example, both RRF and FFIP were 

Bracebridge-managed funds, and Deutsche Bank worked 

closely with both RRF and FFIP to orchestrate each of the 

relevant transactions. As the Court of Federal Claims

found, 

[t]he quickest means of seeing the events in focus 

is to step back and look for the actions of the 

common denominator, Deutsche Bank. It was the 

broker who helped Tiger acquire its Russian assets. It linked Tiger with the Bracebridge funds 

[i.e., RRF and FFIP]. It helped arrange the transfer of the Tiger assets to RRF. It brokered the 

sale of Tiger’s partnership interest in RRF to 

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18 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

FFIP, in the process making certain that the form 

of the sale did not jeopardize the subsequent 

transfer of the built-in losses to a third party. It 

then obtained an option to sell the [CLNs] from 

RRF and finally arranged a sale to General Cigar. 

The evidence clearly indicates that RRF was a 

knowing and willing participant in these activities, at least as of April 1999.

Id. at 620 (emphasis added); see id. at 607–10 (explaining 

the relevant transactions, including Deutsche Bank’s 

involvement, and providing supporting citations). 

This is particularly telling when Tiger (i.e., the only 

party to the transactions that was not managed by Bracebridge) retained its interest in the partnership for approximately two weeks. See id. at 608–09 (explaining that 

Tiger retained its interest from either May 20 or 25, 1999 

to June 3, 1999); see also J.A. 8792, 8949, 9069. The 

Court of Federal Claims found that “the evidence is clear 

that Tiger was interested in the spring of 1999 in selling 

its position in [the CLNs].” RRF II, 122 Fed. Cl. at 618. 

And at the time of Tiger’s contribution to RRF, Tiger 

employees were already emailing about the next step: 

sale. Id. Tiger was at all times interested in liquidity 

(i.e., a sale), not a partnership. Because Culbertson 

requires that the parties “act[] with a business purpose 

[and] intend[] to join together in the present conduct of 

the enterprise,” 337 U.S. at 742, it is highly significant

that Tiger refused to sign the standard subscription 

agreement stating that “the Shares subscribed for hereby 

are being acquired . . . for investment purposes only, . . . and not with the view that any resale or distribution thereof . . . .,” RRF II, 122 Fed. Cl. at 607 (emphases 

added) (citing J.A. 8178); see J.A. 8853, 8900, 8945–48. 

Moreover, relying on the Government’s experts, the 

Court of Federal Claims found “that Tiger’s entry into 

RRF made no sense as an investment, and its exit made

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RUSSIAN RECOVERY FUND LTD. v. UNITED STATES 19

no sense in terms of timing.” RRF II, 122 Fed. Cl. at 618–

19. The transaction neither diversified Tiger’s investment 

portfolio (RRF II, 122 Fed. Cl. at 611; see J.A. 3680–81, 

5725–26) nor provided Tiger with any additional expertise

(RRF II, 122 Fed. Cl. at 614, 619; see J.A. 3678–80, 5724–

26). As one of the world’s largest management companies, Tiger was already paying its own experts and would 

have been better off managing its own CLNs rather than 

“paying for nothing”—i.e., paying management fees to 

RRA—and committing to any kind of lockup period. Id. at 

619. In addition, Tiger did not perform basic due diligence prior to the acquisition (RRF II, 122 Fed. Cl. at 619; 

see J.A. 3655–56, 3741–43, 5541, 5637), and it sold the 

CLNs to FFIP two weeks later at a discount even though

the value had increased during that short period. Id. at 

609. 

As for RRF, the Court of Federal Claims found that

“there is a massive amount of circumstantial evidence 

that RRF was aware early on that Tiger had no real 

interest in becoming a partner,” and it concluded that 

RRF “was a willing participant at some point [at least as 

of April 1999] in facilitating the transfer of assets through 

the sham partnership.” Id. at 620. For example, emails 

between RRF principals in April and May 1999, before the 

first transaction, revealed RRF’s knowledge that Tiger 

intended to engage in a sale and that it would be important to preserve the tax basis of Tiger’s contribution 

for that future sale. Id. at 606, 621. 

These factual findings are sufficient to demonstrate

that neither RRF nor Tiger intended to form a bona fide 

partnership under the Culbertson standard.

3. The Court of Federal Claims Did Not Err in Its Legal 

Conclusion that RRF and Tiger Did Not Form a

Bona Fide Partnership

Lacking any basis to challenge the Court of Federal 

Claims’s factual findings, RRF argues that the Court of 

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20 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

Federal Claims erred in its selection of the appropriate 

legal standard and the legal conclusions it drew from its 

underlying factual findings. See Appellant’s Br. 33–55. 

RRF’s primary argument is that the Court of Federal 

Claims improperly ignored sections of the Internal Revenue Code that dictate that “Tiger was a partner[] and

[that] the built-in losses on the property contributed by 

Tiger properly transferred to the partnership.” Appellant’s Br. 34; see id. 34–40 (citing to I.R.C. 

§§ 704(c), (e)(1), 721(a), 761(b)). By ignoring these provisions, RRF alleges that the Court of Federal Claims 

“eschewed the time-tested and congressionally mandated 

standard for determining partnership formation in favor 

of its own test, under which objective indicia of partnership intent are disregarded as mere ‘formalities’ and one 

party’s unilateral intent can invalidate the partnership.” 

Id. at 40; see id. at 40–50. 

The Court of Federal Claims did not apply “its own 

test,” id. at 40; it applied the Supreme Court’s. Under 

Culbertson, the focus of the inquiry is the parties’ “true 

intent,” 337 U.S. at 742, which is determined by “considering all the facts,” id. Contrary to RRF’s assertions, the 

Court of Federal Claims considered the totality of the 

circumstances, see, e.g., RRF II, 122 Fed. Cl. at 607–08 

(discussing the revisions to the subscription agreement 

mandated by Tiger), 612 (discussing RRF’s expert’s estimate that RRF’s rate of return was 225% for 1999 and 

105% for 2000), 614 (discussing Tiger’s “ability to do its 

own market and asset analysis”), and determined that 

RRF’s and Tiger’s actions were mere “formalities,” id. at 

619. The Court of Federal Claims weighed all of the 

relevant factors, i.e., made underlying factual findings, 

and applied the appropriate legal standard to these 

findings to determine that RRF and Tiger did not enter 

into a bona fide partnership, i.e., reached a legal conclusion. This is exactly what is required by both Culbertson

and our precedent. See 733 U.S. at 742 (requiring courts 

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RUSSIAN RECOVERY FUND LTD. v. UNITED STATES 21

to “consider[] all facts” to determine the parties’ “true 

intent,” i.e., that “the parties in good faith and acting with 

a business purpose intended to join together in the present conduct of the enterprise”); Wells Fargo, 641 F.3d at 

1325 (stating that “the characterization of transactions 

for tax purposes” is a legal issue that is “based on underlying findings of fact” (citation omitted)). We find no error 

in the Court of Federal Claims’s factual findings and 

agree with its legal conclusion.

RRF’s arguments to the contrary are unpersuasive. 

First, RRF contends that Culbertson does not apply here

because Congress has provided the standard governing 

partnership formation. Appellant’s Br. 40–46. In support, RRF cites to a general statement from the D.C. 

Circuit that Culbertson does not supersede clear Congressional intent. Id. at 41 (citing Horn v. Comm’r, 968 F.2d 

1229, 1231 (D.C. Cir. 1992) (“Although useful in determining congressional intent and in avoiding results unintended by tax code provisions, the [Culbertson] doctrine cannot 

trump the plainly expressed intent of the legislature.”)). 

However, Culbertson clearly articulates the standard for

determining whether a partnership is bona fide, and we 

are bound by Culbertson until either the Supreme Court 

or Congress overrules it. Accord Hohn v. United States, 

524 U.S. 236, 252–53 (1998) (“Our decisions remain 

binding precedent until we see fit to reconsider them, 

regardless of whether subsequent cases have raised 

doubts about their continuing vitality.” (citation omitted)); 

Dickerson v. United States, 530 U.S. 428, 437 (2000) 

(“Congress retains the ultimate authority to modify or set 

aside any judicially created rules of evidence and procedure that are not required by the Constitution.” (citations 

omitted)). In addition, even if we were bound by Horn, 

which we are not, see Int’l Custom Prods., Inc. v. United 

States, 843 F.3d 1355, 1360 (Fed. Cir. 2016) (“When our 

precedent is silent on a particular question, we may look 

to another circuit for guidance and may be persuaded by 

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22 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

its analysis, though decisions from other circuits are not 

binding on this court.” (internal quotation marks and 

citation omitted)), Horn does not provide that objective 

indicia should serve as the foundation of a court’s analysis 

of whether a partnership is bona fide. In fact, Horn does 

not mention “partnership” at all. See generally 968 F.2d 

1229. Horn is simply inapposite. 

Second, RRF argues that the Court of Federal Claims 

incorrectly focused on Tiger’s unilateral intent. Appellant’s Br. 46–50. For example, RRF states that the Court 

of Federal Claims “dwelled on its finding that Tiger had 

no real interest in being a long term investor. . . . But the 

[Court of Federal Claims] could never explain why this 

mattered to partnership formation.” Id. at 47. RRF 

overlooks that Culbertson explicitly counsels that both

parties must intend to form a partnership, meaning that 

both RRF’s and Tiger’s intent were relevant. See 337 U.S. 

at 742 (repeatedly referring to the intent of the “parties” 

(emphasis added)). In addition, contrary to RRF’s assertions, the Court of Federal Claims did not look to Tiger’s 

unilateral intent; instead, it found that RRF both knew of 

and shared in Tiger’s intention. See, e.g., RRF II, 122 

Fed. Cl. at 609 n.15 (“The balance of the evidence of RRF’s 

knowledge of what was really happening is so overwhelming . . . .”), 621 (“Tiger and RRF . . . collaborated in a 

scheme to use the tax laws to their advantage. . . . [W]e 

are not obligated to give them effect when their sole 

intent was to avoid treating the . . . transaction as what it 

was, a sale.”). 

Finally, RRF asserts that the Court of Federal Claims 

incorrectly relied on its finding that the parties had 

“use[d] the tax laws to their advantage.” Appellant’s Br. 

50 (quoting RRF II, 122 Fed. Cl. at 621). It is true that a 

“taxpayer has an unquestioned right to decrease or avoid 

his taxes by means which the law permits.” Coltec Indus., 

Inc. v. United States, 454 F.3d 1340, 1355 (Fed. Cir. 2006) 

(citation omitted). However, this was not the foundation 

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RUSSIAN RECOVERY FUND LTD. v. UNITED STATES 23

of the Court of Federal Claims’s holding. Instead, it 

determined that RRF’s and Tiger’s “sole intent” was

manipulating the tax code, RRF II, 122 Fed. Cl. at 621, 

and, thus, that they lacked the “true intent” to form a 

bona fide partnership, Culbertson, 733 U.S. at 742.

B. RRF’s Transaction with Tiger Lacked 

Economic Substance

Even had RRF and Tiger intended to form a bona fide 

partnership, the Court of Federal Claims correctly determined that RRF’s transaction with Tiger fails under the 

economic substance doctrine, see RRF II, 122 Fed. Cl. at 

617, which “prevent[s] taxpayers from subverting the 

legislative purpose of the tax code by engaging in transactions that are fictitious or lack economic reality simply to 

reap a tax benefit,” Coltec, 454 F.3d at 1353–54. We have 

articulated five principles guiding our analysis as to the 

economic substance doctrine, four of which are relevant 

here. 

“First, although the taxpayer has an unquestioned 

right to decrease or avoid his taxes by means which the 

law permits, . . . the law does not permit the taxpayer to 

reap tax benefits from a transaction that lacks economic 

reality.” Id. at 1355 (citation omitted). RRF argues that 

the Court of Federal Claims “did not find tax avoidance 

was RRF’s sole motive.” Appellant’s Br. 51. That is 

untrue. The Court of Federal Claims found that RRF’s 

and Tiger’s “sole intent was to avoid treating 

the . . . transaction as what it was, a sale,” by “collaborat[ing] in a scheme to use the tax laws to their advantage.” RRF II, 122 Fed. Cl. at 621 (emphasis added). 

Although RRF claims that this finding is “unsupported 

and contradicted,” Appellant’s Br. 52, we disagree. RRF 

has not demonstrated that the Court of Federal Claims’s

factual findings were unsupported by the record, as 

explained above. See supra Section III.A.2. Nor has RRF 

shown that these findings are contradicted, as the purCase: 16-1718 Document: 49-2 Page: 23 Filed: 03/14/2017
24 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

portedly contradictory findings primarily relate to the 

formation of RRF, not RRF’s transaction with Tiger. See 

Appellant’s Br. 51–53.

“Second, when the taxpayer claims a deduction, it is 

the taxpayer who bears the burden of proving that the 

transaction has economic substance.” Coltec, 454 F.3d at

1355. RRF claimed a deduction for a loss that was passed 

through to FFIP and then to Ms. Zimmerman. See RRF I, 

101 Fed. Cl. at 500. Because RRF claimed the deduction, 

it “bears the burden of proving that the transaction has 

economic substance.” Coltec, 454 F.3d at 1355. RRF has 

not met that burden. 

“Third, the economic substance of a transaction must 

be viewed objectively rather than subjectively.” Id. at 

1356. There are some objective indicators of the economic 

reality of the transaction, such as RRF’s expert’s testimony that, under RRF’s business model, RRF had a legitimate reason to provide shares instead of paying cash for 

the CLNs. RRF II, 122 Fed. Cl. at 611. However, the 

great bulk of the objective evidence indicates that the

Tiger transaction lacked economic substance, including

Tiger’s quick sale of its RRF shares to FFIP for “approximately $800,000 less than the sales price of the shares 

roughly one to two weeks earlier,” when the value of the 

shares had increased during that period. Id. at 609

(footnote omitted). What could have been accomplished 

via a direct sale of CLNs from Tiger to FFIP was instead 

carried out via Tiger’s contribution of CLNs to RRF and 

subsequent sale of its partnership interest to FFIP. The 

former would result in no transfer of Tiger’s $230 million 

in built-in losses, while the latter transferred the built-in 

losses to U.S. tax-paying entities. Tellingly, RRF arranged for these losses to go entirely to FFIP. See RRF II, 

122 Fed. Cl. at 622 (“Mr. DiBiase ended with a ‘challenge’ 

to the accountants: ‘Get tax losses from [CLNs] to FFIP. 

Don’t want any of such losses to be allocated to other 

entities [i.e., RRF partners] which will get no benefit from 

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RUSSIAN RECOVERY FUND LTD. v. UNITED STATES 25

them.’” (citation omitted)). This principle supports the 

Government. 

“Fourth, the transaction to be analyzed is the one that 

gave rise to the alleged tax benefit.” Coltec, 454 F.3d at 

1356. Here, the transaction that gave rise to the tax 

benefit is RRF’s exchange of shares for Tiger CLNs and, 

relying on expert testimony, the Court of Federal Claims 

found that Tiger “was gaining nothing” from this transaction. RRF II, 122 Fed. Cl. at 619. RRF has not demonstrated any reason to disturb this finding. See Appellant’s 

Br. 51–53.

“Finally, arrangements with subsidiaries that do not 

affect the economic interest of independent third parties 

deserve particularly close scrutiny.” Coltec, 454 F.3d at

1357. Because this transaction is not between subsidiaries, this factor is not relevant to our analysis. In sum, 

four of the five factors indicate that RRF’s transaction 

with Tiger lacked economic substance. 

IV. The Court of Federal Claims Did Not Err in Determining that Penalties Applied

The Court of Federal Claims upheld the 40% penalty 

that the IRS imposed because RRF “did not reasonably 

rely on objective advice from a tax professional based on 

all of the pertinent laws, facts, and circumstances.” RRF 

II, 122 Fed. Cl. at 623–24. RRF argues that imposing 

penalties (1) violates the Internal Revenue Code’s “basic 

principle . . . that no penalty can be imposed when a 

taxpayer’s view is reasonable and in good faith, . . . even if 

a court ultimately disagrees,” Appellant’s Br. 56, and 

(2) ignores “that RRF reasonably relied on its tax experts’ 

advice,” id. at 58 (citation omitted). We disagree.

Although partnerships do not pay income tax, I.R.C. 

§ 701, “the applicability of any penalty . . . which relates 

to an adjustment to a partnership item” is determined at 

the partnership level, id. § 6221. When a taxpayer unCase: 16-1718 Document: 49-2 Page: 25 Filed: 03/14/2017
26 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

derpays, the IRS “shall . . . add[] to the tax an amount 

equal to 20[%] of the portion of the underpayment,” id.

§ 6662(a), and this penalty “shall” be increased to 40% for 

“gross valuation misstatements,” id. § 6662(h)(1). However, “[n]o penalty shall be imposed . . . with respect to any 

portion of an underpayment if it is shown that there was 

a reasonable cause . . . and that the taxpayer acted in 

good faith . . . .” Id. § 6664(c)(1). Section 6664(c)(1) is a 

“narrow defense,” and “[t]he taxpayer bears the burden of 

showing this exception applies.” Stobie Creek Invs. LLC 

v. United States, 608 F.3d 1366, 1381 (Fed. Cir. 2010). 

Reliance on a professional tax advisor’s advice may provide such a defense if, inter alia, the advice is “based upon 

all pertinent facts and circumstances and the law as it 

relates to those facts and circumstances,” Treas. Reg. 

§ 1.6664-4(c)(1)(i) (2003), and is “not . . . based on unreasonable factual or legal assumptions” or “unreasonably 

rel[iant] on the representations . . . of the taxpayer,” id.

§ 1.6664-4(c)(1)(ii). 

We agree with the Court of Federal Claims that RRF 

cannot meet its burden. As to RRF’s first argument, the 

Court of Federal Claims did not apply novel reasoning 

based on a new legal standard. Instead, it applied longstanding Supreme Court precedent, i.e., Culbertson. 

As to RRF’s second argument, the Court of Federal 

Claims found that Mr. DiBiase supplied all of the information upon which Ernst & Young relied. See, e.g., RRF 

II, 122 Fed. Cl. at 622 (stating that “the list of working 

‘facts’ behind E[rnst] & Y[oung]’s preparation of RRF’s tax 

return were orchestrated by Mr. DiBiase to achieve a 

desired result and were not critically evaluated by” Ernst 

& Young’s representatives), 623 (Ernst & Young “simply 

took at face value Mr. DiBiase’s self-interested summary 

and utilized these ‘facts’ to prepare the tax forms.”). 

These conclusions are well-supported by the record. See, 

e.g., J.A. 2576–77 (confirming that the tax group at Ernst 

& Young “accepted the information that was supplied by 

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RUSSIAN RECOVERY FUND LTD. v. UNITED STATES 27

Mr. DiBiase as correct” and that “the tax group at Ernst 

& Young did no independent investigation into the factual 

accuracy of the information that Mr. DiBiase supplied”), 

9350 (fax from Ernst & Young raising concerns about 

ACM P’ship v. Comm’r, 157 F.3d 231 (3d Cir. 1998), a case 

involving the economic substance doctrine, that Ernst & 

Young did not address elsewhere in the record). This

constitutes “unreasonabl[e] rel[iance] on the representations . . . of the taxpayer,” Treas. Reg. § 1.6664-4(c)(1)(ii), 

which does not satisfy the requirements of I.R.C. 

§ 6664(c)(1).

Indeed, the only evidence that RRF offered the Court 

of Federal Claims of any “advice” that Ernst & Young

provided is the tax returns themselves. See RRF II, 122 

Fed. Cl. at 623 (“[T]he only record [RRF] offers of ‘advice’ 

given to RRF concerning the propriety of taking the losses 

is the returns themselves. There are no backup memos or 

records of conversations concerning the propriety of 

claiming built-in losses. We are simply asked to accept 

that, by signing off on the returns for 1999 and 2000, 

E[rnst] & Y[oung] was giving its considered advice on 

whether it was appropriate to take the loss deduction.”). 

The same is true on appeal. See Appellant’s Br. 60–62 

(arguing that tax returns are advice). However, tax 

returns are insufficient to demonstrate reliance on professional tax preparer advice for the reasonable cause exception. See Richardson v. Comm’r, 125 F.3d 551, 558 (7th 

Cir. 1997) (finding no reasonable cause where, “other than 

the fact that a tax preparer signed [the taxpayer’s] returns, there [was] no evidence in the record that [the 

taxpayer] received any advice from professionals”); Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 100 (2000) 

(“The mere fact that a certified public accountant has 

prepared a tax return does not mean that he or she has 

opined on any or all of the items reported therein.”), aff’d, 

299 F.3d 221 (3d Cir. 2002). 

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28 RUSSIAN RECOVERY FUND LTD. v. UNITED STATES

CONCLUSION

We have considered RRF’s remaining arguments and 

find them unpersuasive. For these reasons, the final 

decision of the U.S. Court of Federal Claims is

AFFIRMED

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