United States Court of Appeals for the Federal Circuit 

2008-5045 

JADE TRADING, LLC, by and through, 

ROBERT W. ERVIN and LAURA KAVANAUGH ERVIN 

on behalf of ERVIN CAPITAL, LLC, Partners Other 

Than the Tax Matters Partner, 

 

 Plaintiffs-Appellants, 

v. 

UNITED STATES, 

Defendant-Appellee. 

David D. Aughtry, Chamberlain, Hrdlicka, White, Williams & Martin, of Atlanta, 

Georgia, argued for plaintiffs-appellants. With him on the brief were Nicolas F. Kory; 

and Linda S. Paine, of Houston, Texas. 

Joan I. Oppenheimer, Attorney, Appellate Section, Tax Division, United States 

Department of Justice, of Washington, DC, argued for defendant-appellee. With her on 

the brief were Gilbert S. Rothenberg, Acting Deputy Assistant Attorney General, and 

Richard Farber, Attorney. 

Appealed from: United States Court of Federal Claims 

Judge Mary Ellen Coster Williams 
United States Court of Appeals for the Federal Circuit 

 

2008-5045 

JADE TRADING, LLC, by and through, 

ROBERT W. ERVIN and LAURA KAVANAUGH ERVIN 

on behalf of ERVIN CAPITAL, LLC, Partners Other 

Than the Tax Matters Partner, 

Plaintiffs-Appellants, 

v. 

UNITED STATES, 

Defendant-Appellee. 

Appeal from the United States Court of Federal Claims in 03-CV-2164, Judge Mary 

Ellen Coster Williams. 

_______________________ 

DECIDED: March 23, 2010 

_______________________ 

Before LOURIE, ARCHER, and LINN, Circuit Judges. 

ARCHER, Circuit Judge. 

 Jade Trading, LLC (“Jade”) appeals the Court of Federal Claims’ denial of its 

petition for readjustment of the partnership items of Jade and its affirmance of the 

Internal Revenue Service’s (“IRS” or “Service”) application of penalties at the 

partnership level without consideration of the partners’ reasonable cause defense. Jade 

Trading v. United States, 80 Fed. Cl. 11 (2007). Because the contribution of euro call 

options to Jade (hereinafter sometimes called the spread transaction) was a transaction 

that lacked economic substance, we affirm the Court of Federal Claims’ denial of Jade’s 

petition. Further, we hold that the Court of Federal Claims lacked jurisdiction to review 
the application of penalties based on the outside bases of Jade’s partners, and we 

therefore vacate that portion of the court’s judgment and remand for further 

proceedings. We also vacate as moot the Court of Federal Claims’ determination that 

Temp. Treas. Reg. § 301.6221-1T(c), (d) is not invalid. 

I 

A 

 This case is governed by certain provisions of the Tax Equity and Fiscal 

Responsibility Act of 1982 (“TEFRA”). See 26 §§ U.S.C. 6221-31 (1998).1 Prior to 

TEFRA’s enactment, tax liability adjustments of individual partners based on the 

operations of the partnership were rendered at the partner level. “TEFRA was intended, 

in relevant part, to prevent inconsistent and inequitable income tax treatment between 

various partners of the same partnership resulting from conflicting determinations of 

partnership level items in individual partner proceedings.” RJT Invs. X v. Comm’r 

Internal Revenue, 491 F.3d 732, 737 (8th Cir. 2007). Under TEFRA, all “partnership 

items” are determined in a single proceeding. 26 U.S.C. § 6221.2 The results of this 

proceeding then apply to each individual partner’s income tax return. If a partner 

wishes to challenge any adjustment to his income tax return or to assert any partnerlevel defenses, he may file a partner level refund suit. 26 U.S.C. § 6230(c). 

 1

 Hereinafter, Title 26 U.S.C. is referred to as “the Tax Code.”

2

 Section 6221 of the Tax Code states “[e]xcept as otherwise provided in 

this subchapter, 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 item) shall be determined at the partnership level.” 

2008-5045 2
B 

This case involves a tax shelter designed to produce large, artificial, i.e., 

noneconomic, losses for tax purposes. Jade Trading, 80 Fed. Cl. at 20. In general, the 

tax shelter here involved four steps: “1) Investment in Foreign Currency, 2) Contribution 

to a Partnership, 3) Partnership Investments, 4) Termination of Partnership Interests.” 

Id. at 24-25 (describing tax opinion prepared for potential investors by BDO Seidman, a 

national accounting and tax consulting firm). The investor first simultaneously 

purchased a European-style call option and sold a European-style call option.3 Id. at 

25. The investor next contributed the purchased and sold call options to a partnership. 

Id. The investor eventually exited the partnership, received an asset with a claimed 

high-basis and low-value, and then sold that asset in order to generate a tax loss. Id. A 

tax loss was anticipated because, at the time of the facts giving rise to this case, an 

investor’s basis in a partnership was ordinarily not decreased by the amount of a 

contingent liability contributed to or assessed by a partnership. See Helmer v. Comm’r, 

34 T.C.M. (CCH) 727 (1975) (holding that a contingent obligation, such as an option, 

was not a liability under § 752 of the Tax Code because a partnership’s obligation under 

the option does not become fixed until the option is exercised).4

C 

The parties do not disagree with the basic facts found by the Court of Federal 

Claims. Therefore, we recite only those facts relevant to this decision. 

 3

 An option is a contract that gives the buyer the right, but not the obligation, 

to buy or sell an asset at a predetermined price (the strike price). A European-style 

option is an option that can only be exercised on its expiration date. 

4

 The sold call option contributed to the partnership in this case is similarly a 

contingent obligation that does not become fixed until it is exercised.

2008-5045 3
Robert W. Ervin and his two brothers were equal partners in a cable business, 

which they sold in 1999. The sale proceeds received in March 1999 resulted in a total 

gain to each brother of approximately $13,500,000. Because the buyer was a publicly 

traded company, the transaction was disclosed to the Securities Exchange 

Commission. Thereafter, the Ervins received numerous offers of investment and tax 

advice. After considering a number of these investment and tax proposals, the following 

transaction at issue here was entered into by the Ervin brothers. 

In September 1999, the Ervin brothers each formed a single-member LLC. On 

September 15, 1999, each Ervin LLC entered into a separate master trading agreement 

with AIG, and each paid AIG an $84,100 “account opening fee” pursuant to this 

agreement. On September 29, 1999, each Ervin LLC purchased from AIG a call option 

on the euro at a strike price of 1.0840 (“purchased call option”) for $15,000,020 and sold 

to AIG a call option on the euro at a strike price of 1.0850 (“sold call option”) for 

$14,850,018. The options were all European-style options that expired on September 

29, 2000, and had a face amount of 290,540,000 euros. Each Ervin LLC paid AIG only 

the difference in the premiums of the offsetting options, or $150,002. 

On October 2, 1999, each Ervin LLC entered into a fifteen-month “consulting 

agreement” with New Vista, LLC (an affiliate of Sentinel Advisors, LLC), which required 

each Ervin LLC to pay New Vista $750,000 for “consulting services.” Payment of this 

fee was a prerequisite to the Ervin LLCs being admitted to the Jade partnership. Jade 

was formed by Sentinel and Banque Safra, a Luxembourg financial institution, on 

September 23, 1999, with Sentinel as the managing partner. On October 6, 1999, each 

Ervin LLC entered Jade as a partner. On that same day, each Ervin LLC contributed 

2008-5045 4
the above described euro call options to Jade, as well as $75,000 cash. In December 

1999, each Ervin LLC withdrew from Jade. Each Ervin LLC’s interest in assets 

distributed to it by Jade was valued at $126,122. The distributed assets consisted of 

Xerox stock, which was sold in 1999, and euros. 

On its partnership return for 1999, Jade reported on its Schedule K (Partners’ 

Shares of Income, Credits, Deductions, etc.) a loss of $292,015. Each of the Ervin 

brother’s individual income tax return for 1999 claimed approximately $15 million in tax 

losses from his execution of the spread transaction and involvement in Jade. These tax 

losses resulted from each brother’s increasing the basis of his interest in Jade (“outside 

basis”) by the cost of the purchased call option ($15 million) and not decreasing this 

basis by the amount of the potential liability that Jade assumed under the sold call 

option. 

After auditing the Jade partnership return, the IRS issued a final partnership 

administrative adjustment (“FPAA”) to Jade with respect to Jade’s partnership items for 

the 1999 tax year. The FPAA determined that the Jade partnership should be 

disregarded and all transactions engaged in by Jade should be treated as being 

engaged in directly by the purported partners, including the Ervin LLCs. Thus, the 

FPAA disallowed the deductions claimed for losses purportedly incurred from the 

contribution of the spread transactions to Jade. The FPAA also disallowed the losses 

claimed by Jade and reduced Jade’s claimed distributions of property to zero. The IRS 

also imposed accuracy-related penalties under § 6662 of the Tax Code. 

Subsequently, Jade filed a petition for readjustment of the partnership items of 

Jade in the Court of Federal Claims. The court upheld the IRS’s determination, 

2008-5045 5
concluding that Jade had not met its burden of demonstrating that the contribution of the 

spread transactions to Jade objectively had economic substance. Jade Trading, 80 

Fed. Cl. at 14. The court also affirmed the penalties determined by the IRS at the 

partnership level without considering the reasonable cause defenses that the partners 

might have. Id. at 60. 

Jade appealed, and we have jurisdiction under 28 U.S.C. § 1295(a)(3). 

II 

A 

 We review de novo the Court of Federal Claims’ conclusion that the contribution 

of the spread transaction to Jade lacked economic substance. Coltec Indus., Inc. v. 

United States, 454 F.3d 1340, 1357 (Fed. Cir. 2006). However, we review the court’s 

factual findings underlying this conclusion for clear error. SCS Hosp. Sys., Inc. v. 

Montefiore Hosp., 732 F.2d 1572, 1578 (Fed. Cir. 1984). Finally, we review the court’s 

jurisdictional determinations de novo. Distributed Solutions, Inc. v. United States, 539 

F.3d 1340, 1343 (Fed. Cir. 2008). 

B 

 The Court of Federal Claims held that the Ervin LLCs’ contributions of the spread 

transactions to Jade lacked economic substance. We agree. 

 The economic substance doctrine “require[s] disregarding, for tax purposes, 

transactions that comply with the literal terms of the tax code but lack economic reality.” 

Coltec, 454 F.3d at 1352. In Coltec we discussed the economic substance doctrine in 

detail, leaving no question as to its viability. We explained that the doctrine “represents 

a judicial effort to enforce the statutory purpose of the tax code.” Id. at 1353. The 

2008-5045 6
doctrine, “[f]rom its inception, . . . has been used to prevent 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.” Id. at 1353-54. In Coltec, after 

examining cases from the Supreme Court, various courts of appeals, and our 

predecessor court, we concluded that the economic substance doctrine incorporated 

five general principles. Specifically, we opined that 1) the transaction cannot lack 

economic reality; 2) the taxpayer bears the burden of proving that the transaction has 

economic substance; 3) the economic substance of a transaction must be viewed 

objectively rather than subjectively; 4) the transaction to be analyzed is the one that 

gave rise to the alleged tax benefit; and 5) arrangements with subsidiaries that do not 

affect the economic interests of independent third parties deserve particularly close 

scrutiny. Id. at 1355-57. We also explained that “a lack of economic substance is 

sufficient to disqualify the transaction without proof that the taxpayer’s sole motive is tax 

avoidance.” Id. at 1355. 

 The Ervin LLCs’ transfer of the spread transactions to Jade lacked economic 

substance. The Ervin LLCs purchased euro call options from AIG for a premium of 

$15,000,020 and sold euro options to AIG for a premium of $14,850,018. However, the 

Ervin LLCs paid AIG only the difference – a net premium of $150,002. After contributing 

the spread transactions to Jade and subsequently exiting the partnership, the Ervins 

claimed a basis of over $15 million in their Jade interests by including only the cost of 

the purchased call option. As a result, the artificially inflated basis generated a 

purported $14.9 million tax loss. 

2008-5045 7
As the Court of Federal Claims noted, this loss was “purely fictional.” Jade 

Trading, 80 Fed. Cl. at 45. Each Ervin LLC did not invest $15 million in the spread 

transaction contributed to Jade and did not lose almost $15 million upon exiting Jade. 

Neither option was, in fact, exercised. Thus, each Ervin LLC had a real loss of 

approximately $100,000 upon exiting Jade – the difference between its capital 

contribution of $225,000 to the Jade partnership and its redemption proceeds of 

$126,122 received from Jade. 

 Additionally, the formation of the Jade partnership appears to have had no 

economic purpose. The partnership did nothing to enhance the investment potential of 

the spread transaction. Id. at 46. However, for tax purposes, it was imperative that the 

individual partners contribute the spread transactions to Jade to generate the artificially 

inflated bases. 

 Also significant is the Court of Federal Claims’ determination that the spread 

transaction was virtually guaranteed to be unprofitable. Each Ervin LLC was required to 

pay an $84,100 account opening fee to AIG and a $750,000 New Vista consulting fee.5 

Thus, each Ervin LLC spent at least $834,100 for the chance at making a profit of 

 5

 In its findings, the Court of Federal Claims also included fees for an 

opinion letter prepared by Curtis Mallet. It is unclear whether each Ervin LLC was 

“required” to purchase the $100,000 tax opinion letter. However, given that the letter 

was requested to cover “certain aspects of United States Federal income tax in 

connection with (i) investments in foreign currency that [the Ervins had] made and (ii) 

transactions in which [they] engaged with a partnership . . . that trades in foreign 

currency,” Jade Trading, 80 Fed. Cl. at 33, it is likely that the Ervins felt compelled to 

purchase the letter. The inclusion or absence of this fee does not change our analysis. 

 Additionally, the fees listed above do not include Sentinel’s 2% management fee 

or its 20% incentive fee, or the 5% penalty for early withdrawal from Jade (which applied 

if the Ervin LLCs withdrew from Jade prior to 12 months from entering the partnership, 

which they did). 

2008-5045 8
$140,000.6

 No reasonable investor would engage in such a transaction to earn a profit. 

The Court of Federal Claims concluded, and we agree, that 

This transaction’s fictional loss, inability to realize a profit, lack of 

investment character, meaningless inclusion in a partnership, and 

disproportionate tax advantage as compared to the amount invested and 

potential return, compel a conclusion that the spread transaction 

objectively lacked economic substance. 

Id. at 14. As the Court of Federal Claims found, this spread transaction and its 

contribution to Jade “was developed as a tax avoidance mechanism and not as an 

investment strategy” by the BDO Seidman accounting firm. Id.

 Jade argues that the contribution of the spread transactions to Jade had 

economic substance because the purchased call options and the sold call options were 

separate assets with separate documentation and were owned by unrelated parties. 

The Court of Federal Claims concluded that “the economic realities of the spread 

transaction contributed to Jade made it impossible to delink the option pairs,” 

explaining: 

If the Ervin LLCs had wished to hold only the long position – that is, 

the option they purchased from AIG – they would have faced the prospect 

of theoretically unlimited gain. . . . To obtain that position, the Ervin LLCs 

would have been required to pay AIG the full face amount of the premium, 

about $15 million each, to purchase the options. Neither the Ervin LLCs 

nor Jade ever had sufficient funds to make such a payment. Moreover, 

under this scenario, the entire amount would have been at risk; had the 

euro not risen to 1.084, each Ervin LLC would have lost the entire $15 

million premium it paid to AIG. 

Had the Ervin LLCs wished to hold on the short option sold to AIG, 

they would have faced the prospect of theoretically unlimited loss, as AIG 

would have benefitted in any rise of the euro above 1.085, not capped in 

any way. Because such a transaction would be uncovered, AIG would 

 6

 This is calculated by subtracting the cost of each spread transaction 

($150,002) from its maximum payoff ($290,540) that could occur due to the different 

option prices.

2008-5045 9
have had extensive credit concerns. The Ervin LLCs would not have 

received the premiums to which they would be theoretically entitled, 

because AIG would have retained those premium payments as margin, 

because AIG would not have had the spread’s protection from loss. AIG 

would have required that the Ervins post margin in the amount of at least 

$8 million each. In sum, under the agreement with AIG, the Ervins could 

not separate the components of the spread without AIG’s permission 

which would not likely have been forthcoming without the required margin. 

Id. at 50-51 (citations to record omitted). As the government’s expert explained, “[t]he 

spread strategy component options were priced together, purchased together, 

contributed to Jade together, and closed out by Jade together, and at no time during 

their lives did either the Ervin LLCs or Jade have the means to separate the component 

options.” [JA 5817] The Court of Federal Claims concluded that “the transactions here 

cannot be separated because they were totally dependent on one another from an 

economic and pragmatic standpoint.” Id. at 51. Jade has not persuaded us that this 

conclusion is in error. 

 Accordingly, we affirm the Court of Federal Claims’ judgment that the contribution 

of the spread transactions to Jade lacked economic substance and should be 

disregarded for tax purposes. 

C 

Jade asserts that the Court of Federal Claims does not have jurisdiction to review 

the penalties imposed by the IRS based on the Ervins’ outside bases in Jade. 

Section 6226 of the Tax Code is TEFRA’s judicial review provision. Specifically, 

§ 6226(f) grants the trial court (either the Court of Federal Claims or the United States 

Tax Court): 

jurisdiction to determine all partnership items of the partnership for the 

partnership taxable year to which the notice of final partnership 

administrative adjustment relates, the proper allocation of such items 

2008-5045 10
among the partners, and the applicability of any penalty, addition to tax, or 

additional amount which relates to an adjustment to a partnership item. 

26 U.S.C. § 6226(f) (emphases added).7 

 Jade contends that because the Ervins’ outside bases in Jade, upon which the 

assessed penalties are based, are not partnership items, there could be no penalty 

applicable to a partnership item to trigger the court’s penalty jurisdiction under § 6226(f). 

The government responds that while a partner’s outside basis is an affected item 

and thus not itself a partnership item, most (if not all) of the components of a partner’s 

outside basis are themselves partnership items. The government further argues that 

since all “legal and factual determinations that underlie the determination of the amount, 

timing, and characterization” of partnership items are themselves partnership items, the 

lack of economic substance of the spread transactions contributed to Jade is a 

partnership item. 

In a factually analogous case, the D.C. Circuit considered whether § 6226(f) 

conferred jurisdiction on the trial court, in that case the Tax Court, to determine that the 

partners had no outside bases in a partnership that was disregarded for tax purposes. 

Petaluma FX Partners , LLC. v. Comm’r of Internal Revenue Serv., 591 F.3d 649 (D.C. 

Cir. 2010). In Petaluma, the purported partnership, Petaluma, was formed with the 

purpose of engaging in foreign currency option trading. Id. at 650. The partners each 

contributed pairs of offsetting long and short foreign currency options to become 

 7

 Under TEFRA, a “partnership item” is “any item required to be taken into 

account for the partnership’s taxable year under any provision of subtitle A . . . provided 

that . . . such item is more appropriately determined at the partnership level than at the 

partner level.” 26 U.S.C. § 6231(a)(3). TEFRA further defines two other terms, namely, 

a “nonpartnership item” and an “affected item.” A “nonpartnership item” is one that is 

not a “partnership item.” 26 U.S.C. § 6231(a)(4). And an “affected item” is one that is 

affected by a “partnership item.” 26 U.S.C. § 6231(a)5.

2008-5045 11
partners in Petaluma. Id. The partners increased their adjusted bases in Petaluma to 

reflect the long options they contributed, but they did not reduce those bases to reflect 

Petaluma’s assumption of their short options. Id. The partners subsequently withdrew 

from Petaluma, which fully liquidated their interest in the partnership by distributing cash 

and shares of Scient stock. Id. Prior to the end of the year, the partners sold their 

stock, taking their adjusted bases in the distributed stock equivalent to their adjusted 

bases in Petaluma immediately prior to the distribution. Id. Given the inflated adjusted 

bases in the stock, these sales created substantial short-term capital losses that the 

partners claimed on their federal tax returns. Id. 

The parties’ arguments on appeal in Petaluma were strikingly similar to those in 

this case. As in the present case, Petaluma argued that outside basis is an affected 

item, not a partnership item and, therefore, the Tax Court had no right to determine that 

its partners’ outside bases were zero. Id. at 654. Also similar to this case, the 

government conceded that outside basis is not a partnership item but then argued that 

outside basis is an affected item whose elements are largely or entirely partnership 

items. Id.

The D.C. Circuit agreed with Petaluma, stating that “the partners’ outside bases 

are affected items, not partnership items. Unlike partnership items, affected items are 

determined not at the partnership level, but at the individual partner level.” Id. The 

court observed that not only are partnership items and affected items treated at different 

levels, the assessment procedures are different. Id. at 655. In the case of a partnership 

item, the IRS may directly assess the tax against the individual partner by making a 

computational adjustment—applying the new tax treatment of all partnership items to 

2008-5045 12
the partner’s return—and the partner must bring a refund claim to challenge the 

computation. 26 U.S.C. § 6230(c)(1). However, if the partner’s liability relates to 

affected items, the IRS must send a notice of deficiency to that partner, thereby initiating 

a deficiency proceeding against him individually. 26 U.S.C. § 6230(a)(2)(A)(i); see 

Desmet v. Comm’r of Internal Rev., 581 F.3d 297, 302 (6th Cir. 2009) (explaining that 

the IRS has different procedures for making adjustments to a partner’s tax liability 

depending on whether the item is a partnership item or an affected item). 

The court concluded that under § 6226(f) the Tax Court did not have jurisdiction 

to review the determination that the individual partners had no outside basis in 

Petaluma. The court rejected the government’s contention that, although an affected 

item, outside basis could be determined in the partnership-level proceeding. “The fact 

that a determination seems obvious or easy does not expand the court’s jurisdiction 

beyond what the statute provides. In other words, it does not matter how low the fruit 

hangs when one is forbidden to pick it.” Id. at 655. 

We find the D.C. Circuit’s reasoning persuasive and see no reason to depart 

from it in this case. While the parties here are different, each of the Ervins’ outside 

basis in Jade is an affected item and thus not determined at the partnership level. See

Schell v. United States, 598 F.3d 1378, 1381-82 (Fed. Cir. 2009) (“An example of an 

‘affected item’ is a partner's tax basis in his partnership interest, which is affected by 

partnership items such as partnership income or loss.”). We also agree with the D.C. 

Circuit’s observation: 

[N]othing about the concept of outside basis indicates that it is more 

appropriately determined at the partnership level. If disregarding a 

partnership leads ineluctably to the conclusion that its partners have no 

outside basis, that should be just as obvious in partner-level proceedings 

2008-5045 13
as it is in partnership-level proceedings. Moreover, with the invalidity of 

the partnership conclusively established as a partnership-level 

determination, there is little danger that outside basis will receive 

inconsistent treatment at the individual partner level. 

Petaluma, 591 F.3d at 655. 

Because outside basis is not a “partnership item,” we conclude that the Court of 

Federal Claims lacked jurisdiction to determine that the Ervins had no outside basis in 

Jade. 

As explained above, under § 6226(f), the trial court has jurisdiction over “the 

applicability of any penalty . . . which relates to an adjustment to a partnership item.” 

The penalty in this case was imposed on the underpayment of income tax due to the 

gross valuation misstatement of the partners’ outside basis in the partnership. Outside 

basis is an affected item, not a partnership item; thus, the penalty here relates to an 

adjustment of an affected item, not a partnership item. Accordingly, the trial court did 

not have jurisdiction over the applicability of this particular penalty. 

Because it is possible that at least some portion of the penalties could have been 

computed without relying on the partners’ outside bases, we conclude that the penalty 

issue should be vacated and remanded. See id. at 655-56 (remanding for a 

determination as to whether some of the penalties could have been assessed without 

partner-level computations). Remand proceedings should determine whether any 

penalties could have been assessed without relying on the Ervins’ outside bases. 

D 

 Finally, Jade argues that the Court of Federal Claims should have considered the 

Ervin’s reasonable cause defenses, asserting that Temp. Treas. Reg. § 301.6221-1T(c), 

(d) is invalid. Because we vacate that portion of the Court of Federal Claims’ judgment 

2008-5045 14
affirming the penalties assessed against the Ervins, the validity challenge to the 

temporary regulation is moot at this time, and we decline to reach it. See United States 

v. Alaska S.S. Co., 253 U.S. 113, 116 (1920) (“[I]t is a settled principle in this court that 

it will determine only actual matters in controversy essential to the decision of the 

particular case before it.”); see also United States v. UPS Customhouse Brokerage, Inc.

575 F.3d 1376, 1383 (Fed. Cir. 2009) (vacating as moot the issue of whether Customs 

could impose penalties aggregating more than $30,000 under 19 C.F.R. § 111.91 when 

the case was being remanded for Customs to conduct a proper analysis of whether 

there was in fact a violation of 19 U.S.C. § 1641); Elkem Metals Co. v. United States, 

468 F.3d 795, 803 (Fed. Cir. 2006) (concluding that because an amount was properly 

excluded from constructed value, the issue of whether the party correctly reported that 

amount was moot and need not be decided). While the Court of Federal Claims could 

conclude on remand that some of the penalties could have been assessed without 

relying on the Ervins’ outside basis and thus putting this issue back into play, the 

opposite is also true. Although these issues are important to the parties and may 

become relevant later in this case, deciding them now would be premature. 

Accordingly, we vacate that portion of the Court of Federal Claims’ judgment 

concluding that the Ervins’ partner-level defenses cannot be brought at the partnership 

level. 

III 

 Because the Court of Federal Claims correctly concluded that the contribution of 

the spread transactions to Jade lacked economic substance, we affirm the court’s denial 

of Jade’s petition for readjustment of partnership items. However, because the Court of 

2008-5045 15
Federal Claims lacked jurisdiction to review the penalties imposed on the underpayment 

of income tax due to the gross valuation misstatement of the Ervins’ outside bases in 

Jade, we vacate that portion of the court’s judgment affirming the penalties assessed 

against the Ervins. Additionally, we remand this issue for the court to determine 

whether any part of the penalties could have been assessed without relying on the 

Ervins’ outside bases and thus falling within the court’s jurisdiction. Finally, we vacate 

as moot that portion of the Court of Federal Claims’ judgment upholding the validity of 

Temp. Treas. Reg. § 301.6221-1T(c), (d). 

AFFIRMED-IN-PART, REVERSED-IN-PART, VACATED-IN-PART.

COSTS 

Each party shall bear its own costs. 

2008-5045 16