TAX COURT OPINION

Case: Michael E. Napoliello
Docket Number: 13983-06
Judge: Kroupa
Opinion Type: memo
Filed: 05/18/2009
Pages: 22

T .C . Memo . 2009- .1 0 UNITED STATES TAX COUR T MICHAEL E . NAPOLIELLO, Petitioner v COMMISSIONER OF INTERNAL REVENI}E, Responden t Docket No . 13983-06 . Filed May 18, 2009 . Edward M . Robbins, Jr . , for petitioner .. Halvor N . Adams III, Mark O'Leary , and Harry J . Negro , fo r respondent . MEMORANDUM OPINION KROUPA, Judge : This partner-level matter is before th e Court on the parties' cross-motions for summary judgment unde r Rule 121 .1 Respondent . issued petitioner(cid:127)an affected item s deficiency notice . (deficiency notice) . after no partner'contested .11 'All Rule references . are to the Tax Court Rules of-Practic e and Procedure, and all section references are to the Interna l Revenue Code in effect for, the year at issue, unless otherwis e indicated . -2 - the partnership-level determinations in a notice of final partnership administrative adjustment (FPAA) issued to AD FX Trading 2000 Fund, LLC (partnership) .2 There are two issues for decision . . The first issue is whether respondent issued petitioner a valid deficiency notice under sectio n 6230(a)(2)(A)(i) . We hold that the deficiency notice is valid n -fir y tea, , r . it andtwehave jurisdiction because the deficiency is attributable to an 'affected item requiring partner-level factua l determinations . The second issue is whether the deficiency gas notice is invalid because the FPAA violated due process by failin'g to provide petitioner adequate'notice .of the $12,072,92 7 deficiency in his Federal income taxes ($12 million deficiency) . , .We h94d that the deficiency notice is valid because th e determinations in the FPAA adequately put petitioner on notic e that respondent had finally determined' adjustments to the partnership return . We shall grant respondent's motion for summary judgment and deny petitioner's cross-motion for summary judgment for-the reasons discussed . I . Preliminarie s Backgroun d The facts we recite are included in the parties' stipulation of facts and accompanying exhibits, matters admitted in th e 2The parties agree that it was conclusively determined at the partnership level that AD FX Trading 2000 Fund, LLC, is a sham that is disregarded for Federal tax purposes . We use the termsil"partnership'," "partner," and related terms fo r convenience . t ~~ pleadings or motions, or u ncontested facts presented in th e parties'oral arguments . We treat the, facts as tru e purposes of deciding the parties ' motion not-as-'findings o f fact for this case . See' Fed . . R .' Ci .vr P . . v . Commissioner , 106 .T .C . 441,' 442 n . 2 996), affd . withou t published opinion 139 F .3d,907 (9th Cir .°. 1998 .) II . Petitioner' .s Transaction s This case is one of many before th e Court involving so- . called Son-of-BOSS tax shelters . packaged by various law an d accounting firms 3 Petitioner participated in the tax shelter t o create a large artificial capital . .loss in .2000 to offset a '$60i11 million capital gain resulting from the sale of .petitioner' ;s 50- percent interest in a Hollywood promotions agency with Jaso n Moskowitz known as U .S . Marketing ..;& Promotions, .Inc . Petitione r resided in California at the 'time' he fihed the petition . Petitioner engaged in several transactions involving th e partnership to create a cumulative basis million in securities (partnersh'ipsecuri ties) that wer e purchased by the partnership for $387,95 ;1 . First, petitione r contributed $1 .5' million in exchange'for, his interest in a single-member limited liability company, ;MN Trading,_LLC (MN . Trading) . Then' petitioner, through MN,Tr ading, used the(cid:127)$l . 5 million to purchase two pairs of'offsets''ng :long and short . foreign currency options, the first involving the euro'and,the<;f { 3 See generally Kligfeld Holdings v . {Co mmissioner , .128 T .C j' 192 (2007), and Notice - 2 0 00 -44, 2000- 2 C .B . 255, for a , generali{ { description of similar transactions . 1 H -4- Japanese yen and the second involving the U .S . dollar and th e euro . ,The transactions involved purchased options with premium s f $30 ;million each (long options) and "sold options with premium s of $29 .25 million each (short options) ., Petitioner then contributed his interest in MN Trading in exchange for an 82 .52- percent interest in the partnership . About a month later petitioner withdrew from the partnership and received cash an d the partnership securities for-his partnership interest .- He sol d the partnership securities shortly thereafter for $358,296 an d reportedla $60,942,026 loss ($61 million capital loss) in connection with the sale on his Form .1040, U .S .,Individual Income Tax Return, for 2000 . Petitioner calculated this loss by allocating to the partnership securities,his claimed outside basis in th e partnership at the time of his withdrawal (less cash received) . Petitioner included the premiums of the long options in determining his .outside basis in the partnership, but he did no t decrease his basis in the partnership to reflect the partnership's assumption of the short options . III . : Partnership-Level Determinations g Respondent issued petitioner, a notice partner, in the-, partnership, the FPAA for 2000 as a result of the partners' participation, in the tax shelter . The,FPAA adjusted several partre%rship items for 2000 to zero, including amounts reported a s capital contributions, distributions of property other than money, interest expense, distributions of money, and net loss . .1 In addition, respondent made severa . determinations in th e "Exhibit A--Explanation of Items" '(Exhibit A) .9 Thes e determinations include, . among other things, that : T b partnership was not a partnership in-fact ; the' partnership wa s sham that lacked economic substance and its only purpose was tax j ' avoidance ; all transactions the partnership entered into shoul d be treated as being entered into"directly by the partners ; an d any purported losses resulting from the ttax shel-ter were not i allowable as deductions . No partner timely filed a petition t o contest the determinations in the'FPAA . Res ..pondeht timely : issued petitioner,, the deficiency notic e determining the $12 million deficiency . in petitioner's' .Federal ' income tax for-2000 .' This deficiency re's ulted from adjustment s to income of $59,333,518 in capital .gairi'Q or loss5 and $519,32 6 itemized deductions .6 Respondent also determined 'that th e $61,300 , 322 cost basis petitioner claimed in the partnershi p securities was reduced to $358,383,' the . price-the partnershi p appendix . 5Respondent disallowed the $60,942,0 ; to the partnership securities and allowe d net short-term capital losses . 'The itemized deductions-adjustmentiis a"computational' statutory adjustment required under sec . 68 resulting from a n increase in petitioner's adjusted gross ncome due to , respondent 's capital gains adjustments . 'Respondent originally determined t. h cost basis in the securities was $358,383 -6- paid for the partnership securities on the date of purchase . Respondent did not determine penalties or additions to tax because petitioner had disclosed his participation in the tax shelter as part of an agreement with respondent under Internal Revenue Service Announcement 2002-2, 2002-1 C .B . 304 . ;Petitioner timely filed a petition for redetermination of the'-deficiency with this Court . The parties presented ora l arguments before this Court with regard to the cross-motions for summary judgment . Petitioner argued in his summary judgment motion that respondent's determinations in Exhibit A, particularly that the partnership was a sham and lacked economi c substance, were not partnership items that were conclusivel y determined at the partnership level . Petitioner has conceded, however, that the FPAA here is materially identical to the FPAA in Petaluma FX Partners, LLC v . Commissioner , 131 T .C . , (2008)(slip op . at 22), where we held°a determination that a partnership is a sham disregarded for tax purposes is a partnership item . Accordingly, petitioner has abandoned this argument . Discussio n We have pending cross-motions for summary judgment and must decide whether to grant either motion . !Petitioner does not dispute that the tax shelter in which he participated was a sham, and he raises only procedural argument s 7( . . .continued) concedes that the partnership's actual cost basis was $387,951 . -7 in defense to collection . Petitioner ' s rguments present two issues-for decision . The first issue is,whether,we have jurisdiction over the deficiency determined in the deficiency notice because ._, it'is attributable to affected items requiring I F partner-level determinations . We conclu I~ e_that-we do hav e jurisdiction . The second issue is . whether the FPAA violated the notice requirement of-due process . . We conclude that it did not . We begin by discussing the standard' for summary judgment . We then turn to the Court's jurisdiction'; to redetermine the $12 ' million deficiency and petitioner's tax 'liability . .Finally, w e address petitioner' .s due process argument . I I . Summary Judgment Standar d Summary judgment is intended to expedite litigation an d avoid unnecessary and expensive trials .*: See, e .g ., FPL Group :, Inc . & Subs . v . Commissioner,-116 T .C . 73, 74 (2001) . Either party may move for summary ;judgment- upon, all or any part of theH' legal issues in controversy . Rule 121(a) . We may grant a summary judgment motion where there" is no genuine issue of any E i'{ material fact and .a decision may be rendered as a matter of law . 1 Rule 121(a) and (b) ; Sundstrand Corp . v .~ (Commissioner , 98 T .C . 518, 520 (1992), affd . 17 F .3d 965, (7th Cir . 1994) . . This case is ripe for summary judgment because all of the .! ion may be rendered as'°! matter of law . II . General TEFRA Procedure s We now turn to our jurisdiction in affected items deficiency notice, cases . This Court is a court of, limited jurisdiction, an d we may exercise . jurisdiction only to the extent provided b y i statute . See sec . 7442 ; GAF Corp . & Subs . v . Commissioner , 11 4 T .C . 519, 521 (2000) . Our jurisdiction to redetermine a deficiency in tax depends on a valid deficiency notice and ;!a timely, filed petition . GAF Corp . & Subs . v . Commissioner , supra at 52,1'. A taxpayer to whom a deficiency notice has been sent can generally petition this Court for a redetermination of the deficiency . Sec . 6213 . Special rules apply, however, for certain partnerships and their partners . ' :Partnerships do not pay Federal income taxes, but they are required,to file annual information returns reporting the partner's'4 distributive shares of income, deductions, and other tax items . Secs . 701, 6031 . The individual partners then report their distr-ibutive shares of the tax items on their Federal income .,,tax returns . Secs . 701-704 . Congress enacted the unified audit,and~litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub . L . 97-248, Sec . 401, 96 Stat . 648, to provide consistent treatment of partnership items among partners in the same partnership and to ease the substantial administrative burden that resulted from duplicative audits and litigation . See Petaluma FX Partners, LLC v . Commissioner , supra at (slip op . at 10) . I -9- Under the TEFRA-rules, partnership items are determined i n' ' partnership-level proceedings, while nonpartnership items are determined at the i.ndividua-l partner level . Sec . 6221 ; Affiliated Equip . :Leasing II v . Commissiner , 97(cid:127) T .C . 575, 576 (1991) . A partnership item"is any item required'to be taken into account for the partnership's taxable year to the extent regulations specify it is an item more appropriately determined , at the partnership level than the'partne' level . Sec . 6231 (a) (3) . Partnership-level . determinations also impact certain item s , and their resolution depends on partnership -level determination s of individual partners . These are referred to as affected item ; f f Sec . 6231 (a) (5) ; Maxwell- v . Commissioner", 87 T .C . 783, 79 2 (1986) Affected,items- cannot be tried .' s'part of a partners personal tax case until the partner ship -~evel proceeding has i III . The Parties' Argument s The parties agree that the deficiency notice is valid : and w e have jurisdiction in'-this partner-levelcase only if the deficiency procedures of subchapter t ofjchapter 63 (deficien t procedures) apply as providedunder sect= on 62-30(a) (2) i(A) . Respondent argues that we have jurisdict on under section 6230 (a) (2) (A) (i) because the deficiency s attributable to an affected item and requires partner-leve-l factual determination' s Petitioner makes two c.ounterarguments thatthe,requirements of( l section 6230(a) (2) (A) (i) xhave not .been met and therefore -10- respondent was required to directly assess the tax rather tha n issuing the deficiency notice . First, .petitioner argues that the deficiencies are . attributable to a partnership item, outside basis, rather than an affected item . Second, petitioner argues that even if the deficiency is attributable to an affected item, respondent should have directly assessed the tax because respondent was not required to make partner-level factual determinations . We disagree with_both of petitioner's argument s and address them each in turn . IV . . Deficiency Attributable to an Affected Ite m This Court has repeatedly held that we lack jurisdiction, in a partner-level proceeding involving nonpartnership items, to redetermine a deficiency, or any portion thereof, attributable to the tax'treatment of a partnership item . Bradley v . Commissioner , 100 T .C . 367, 371 (1993) (this Court may not redetermine a partner's distributive share of partnership losse s in a partner-level proceeding) . We now decide whether the $12 million deficiency is attributable to &,partnership item . Respondent determined in the deficiency. notice that petitioner's cost bases in the partnership securities weretith e actual amounts the partnership paid for the securities and allocated no additional costs to. the securities . Respondent then disallowed both the $61 million capital loss petitioner reporte d from thedlsale of the securities and certain itemized deductions to determine the $12 million deficiency . Respondent adjusted, petitioner's bases in the partnership securities as a result of the determinations .in .'the disregarded as a sham and all of the partnership's transactions ) are treated as .being engaged in' directly' by the partners . These! determinations are partnership' items . See Petaluma FX,Partners , LLC v .', Co mm issioner , 131 T .C . (slip op . at 21-22) . We °'d not have jurisdiction to revisit these determinations a s the y were conclusively ;determined when no part ner contested th e determinations in the FPAA . See Genesis4bil & Gas, Ltd . v . ' Commissioner , 93 T .C": 562 ; 565-566 (1989;) see also' Sente Inv . Club Pship . v . Commissioner , 95 T .C . 243 ( 1990 )' ; Palmer v . Commissioner ,_T .C . Memo . 1992-352,',affd .( without publishe d opinion 4 F' .3d 1000 (11th,Cir . 1993) . Petitioner"ignores the determinations in the deficienc y notice and argues that the :deficiency-isk attributable t o petitioner's outside basis in the'partne ~~r'ship, which he .argues ' a partnership item . We recently held that we ;may determine)= a partner's outside basis at the partnership level in limite d circumstances wherethe partnership is disregarded as a sham i n partnership-level proceeding . Petaluma FX Partners, LLC,v . Commissioner , supra . Petitioner asserts that, if his outside. basis in the partnership is zero , then his bases in th e partnership securities are zero,8'and we' ack jurisdiction t o redetermine the deficiency because it is ' attributable to a 'Generally, the basis of property (other than money ) distributed by a partnership to a partner in liquidation of the ' partner's interest shall be an amount equal to the adjusted basi l of such partner's interest inthe .partnership,reduced b~ money distributed in the same transaction . Sec . 732(b) . -12- partnership item, outside basis . See Bradley v .Commissioner , supra at ]371 . Petitioner's argument is misplaced . Affected items are defined to include any item to the extent that it is affected by a partnership item . Sec . 623l(a)(5) . We hold that petitioner's bases in the partnership securities are affected items because they result from-the conclusive partnership-level determinations disregarding the partnership as a sham and treating all of th e partnership's transactions as being engaged, in directly by th e partners . V . Affected Items That Require Partner-Level Determinations Petitioner argues, in the alternative, that we still lac k i ,jurisdiction even if the .deficiency is attributable to a n affected item because no partner-level determinations wer e necessary to determine the $12 million deficiency under sectio n { 6230(a)(2)(A)(i) . Respondent counters that the deficiency„notice was necessary because determination of the deficiency requires partner-level determinations . We agree with respondent . There are two types of . affected items . Petitioner asserts that his bases in the partnership securities are of the first type, which requires a strictly computational adjustment to record the change in a partner's tax liability resulting from th e proper treatment of partnership items . , ; Sec . .6231 (a)(6) ; see Brookes y . Commissioner , 108 T .C . 1, 5 .(1997) . Computationa l affected items include those items on a partner's return that vary if there is a change in the individual partner's adjusted -13- gross income, for example, the threshold ; dollar limit for the~i medical expense deduction under section 213 . Sec . 301 .6231(a)(6)-1T(a)(1), Temporary Proced . & Admin . Regs, 64 Fed . Reg . .3840 (Jan . 26, 1999) . Once the-part ership-level ! proceedings are completed, the Commissioner is permitted to . . ;l .I? assess a computational adjustment against a partner without' issuing a deficiency notice . See .sec . 6230(a)(1) ; Brookes v . Commissioner , . supra at 5 . Petitioner's $12 million deficiency, ;is not attributable to, this purely computational type 'of affected item . Instead i t falls within the second type of affecte d tem, one that i s dependent upon factual determinations .tha are .made at th e individual partner level . See Brookes v'.ICommissioner ,- supra at ~ 5 . Respondent was required to make partner-level factual determinations regarding petitioner's losses from the sale of th e If ~~ distributed partnership ., securities . Forexample, respondent needed to determine, . among other'things,~ he number and identit y of securities petitioner received from the partnership, the pri'c~ { at which petitioner sold the respective securities, and any ;' associated'allowable costs of the sale . ;ee Domulewicz v . Commissioner, 129 T .C . 1=l, 20'(2007) ;; sec 302 .6231 ( a) (6)- 1T(a)(2), Temporary Proced . & Admin . Regs 64 Fed . Reg . 384 0 (Jan . 26, 1999) . Because the normal deficiency procedures appl y to affected items that require partner .-level determinations, w e hold that the deficiency notice is validand we have jurisdiction to redetermine the deficiency . See se -c .6230(a)(2)(A.)(i) . . a VI . TheiDeficienc y -14- We have determined that we have jurisdiction to redetermine the $12 million deficiency, and we do so now . Respondent disallowed the reported $61 million capital loss in determinin g the deficiency . In addition, respondent argues that he properl y disallowed $1 .6 million in alleged transaction costs related to the partnership . We focus now on disallowing any capital loss . The parties agree that it was conclusively determined at the partnership level that the partnership is a sham without economi c substance and is disregarded for tax purposes . Petitioner concedes that there can be no outside basis in a disregarded partnership . Petaluma FX Partners, LLC v . Commissioner , 131 T .C . at i (slip_op . at 26) . Accordingly, petitioner had no outsid e basis in the partnership to attach to the assets he received fro m the partnership in purported liquidation of his interest unde r section 732(b), and petitioner's bases in the partnership securities cannot be inflated by his purported outside basis in thelpartnership . Petitioner is considered, instead, to have purchased the partnership securities directly as determined in the FPAA, .(cid:127), . See sec . 1 .701-2(b)(1), Income Tax Regs . Accordingly, petitioner' s cumulative basis in the partnership securities is $387,951, the partnership's cost basis on the date the partnership purchased the securities, under sections 1011 and 1012 . Petitioner sold the"partnership securities for $358,296 . Subtracting th e $358,296, sale price from the $387,951 cost creates a $29,655 -15- loss . Respondent disallowed this loss because he-determined th a t' petitioner had no profit . motive under section 165(c)(2) for, entering into the . stock transaction . and that the stock transaction-Jacked economic substance . . 'See Illes v .' I Comm issioner , 982 F . 2d 163 ;. 165-166 (6th ' Cir . ; 1992 )- ., affg ;'T .C .. Memo . 1991- 449 ; Forseth v . Commissioner , ;, 845F . 2d 746 (7th Cir' { I 1988 ), affg ., 85 T .C . 127 (1985 ) ; Enrici v . Commissioner , 813 F12',d# I ll' 293 (9th Cir . 198 7 ), affg . Forseth v . Commissioner , 85 T .C . 127 1 Petitioner does not contes t petitioner raises, . onl y 1 argument s admits thathe did not recognize .a loss the sale of th e partnership securities . 9 . 'We conclude that petitioner has conceded this issue . Accordingly, : we uphold respondent' s determination, disallowing the loss . We now turn to the '$1 .6 million transaction costs that ' petitioner alleges are deductible unde r ~s ection 16 2 Ordinary and necessary--expenses paid .o r ncurred in carryin g any trade or business are generally deductible . Sec . 162 . Similarly, the ordinary and necessary . expenses aid for the ; production, .management, or,maintenance of property held for . th e production of income may also ;be deductibile . Sec . 212 1 Petitioner is required .to have, profit .as instead of ;tax savings to take deductions however . See Aaro Science . Co : . v . Commis s ioner , 'Petitioner argues he had no bases ii securities and therefore could'not recog n sale . J -16- (5th Cir . 1991), affg . T .C . Memo . 1989-687 ; Fischer v . United States , 490 F .2d 218, 222 (7th Cir-. 1973) ; Hirsch v . Commissioner , 315 F .2d 731, 736 (9th Cir . 1963), affg . T .C . Memo . 1961-256 ; Looney v . Commissioner , T .C .-Memo . 1985-326, affd . without published opinion 810 F .2d 205 (9th Cir . 1987) . We conclude that petitioner did not have a profit motive but entered into .',the partnership solely to create a large artificial capital loss to lower his tax liability . Further, petitioner may not deduct costs incurred t o implement a transaction that lacks economic substance . Ne w Phoenix Sunrise Corp . v . Commissioner , 132 T .C'. (2009) (slip op . at 38-40) . We conclude that petitioner's participation in the partnership cannot form the basis of any deductions ! because the partnership is disregarded .as a sham without economic substance . See Ferguson v . Commissioner , 29 F .3d 98, 102 (2d Cir . 1994), affg . Peat Oil & Gas Associates v . Commissioner , 10 0 T .C . 271 (1993) . Accordingly, we hold that respondent properly disallowed these deductions' . VII . Notice Requirements of Due Proces s We now address petitioner's final argument . Petitioner argues,i,that the . deficiency notice is invalid-because the F .PAA did not provide petitioner with fair notice and violated his right to due process of law .10 Petitioner admits he received the FPAA but argues that it did not provide-him adequate notice that hi s .;"Nfo person shall * * * be deprived of life, liberty,. or property; without due process of law U .S . Const . amend . V . 10 1 .' failure to file'a petition would conclusively preclude-him from.r, contesting an approximately $12 million deficiency . We disagree that there is a due process ; violation . , A fundamental requirement of due process is .n .otice reasonably calculated,,,under'all the circumstances, to'inform interested parties of the pendency of the action and afford,them an opportunity .to present their objections . Mullane v . Cent . Hanover . Bank & Trust Co . , 339 U .S . 306, 314 (1950) . Due process is flexible, however,-and calls, for such' procedural protections . as the .particular situation demands . Morrissey v . Brewer , 40 8 U .S . 471, 481 (cid:127)(1,972 ) TEFRA's notice provisions generally afeguard due process rights by providing"partners with ; notice! f the partnershi p adjustment and'an opportunity to particip to in the partnershi p level proceeding . See Walthall v .'UnitediStates ,°131 F, .3d 12891, 1294-1295 (9th Cir . .19 .97) ; Brookes v . Commissioner , 108 T .C . 5 . AnFPAA need not be in any particular form, and any, statements or computations in or attached to the FPAA may b e considered in determining its,validity . . :See generally Clovis I '[, v . Commissioner , 88T .C-. 980, 982 .(,1987 .) . ' An FPAA must', however, provide minimal notice to,the taxpayer that the Internal Revenu e Service (IRS) has finally determined adjustments to the partnership return . . Triangle Investors L'td . Pship . v . Commissioner, 95 T .C . . 610, 613 (1990) ; Clovis I V . Commissioner , supra at 982 . An FPAA is not-,required to- notify partners of III -18- their ;; individual tax deficiencies at the partner level as I petitioner contends . Respondent notified petitioner in the FPAA's Exhibit A that the partnership is disregarded for tax purposes, that al l transactions engaged in by the partnership are treated as engaged in directly by its partners, and that the partners would not be allowed to inflate their bases in the partnership to eliminate gain . Petitioner received the FPAA and had the opportunity to file ;a petition at the partnership level contesting respondent's determ'in a'tions in the FPAA . Petitioner chose not to do so . 'Petitioner waited until the partner-level proceeding, instead, to argue that the FPAA did not provide him adequat e notice, . He makes this argument despite the multipl e determinations in the FPAA that disallow all tax benefits of th e tax steel"ter . Petitioner's participation in a complicated basis- inflating tax shelter belies his naivete . Petitioner purchased a packaged tax shelter involving several sophisticated transactions to,a void paying taxes on a $60 million : gain . He received the advice . of multiple professionals, including counsel, regardin g this'purchase . He later disclosed his participation in this ta x shelter to avoid paying additions to tax or penalties . We conclude that the FPAA provided fair and reasonable notice to petitioner that the IRS had finally determined adjustments to the partnership return and did not violate " petitioner's right to due process of law . VIII . Conclusio n We conclude that respondent is entitled torjudgment as a matter of law . Accordingly,, ;'we ., shall , gr a for summary judgment and deny petitioner ' judgment . In reaching our holdings, .we have considered al l made, and to the extent not mentioned , irrelevant , moot, or without merit . To reflect the foregoin x -20- APPENDI X EXHIBIT A - Explanation of Item s 1 . It is determined that neither AD FX Trading 2000 Fund, LLC nor its purported partners have established the existence of AD FX Trading 2000 Fund, LLC as partnership as a matter of fact . 2 . Even if AD FX Trading 2000 Fund, LLC existed as a partnership, the purported partnership was formed and ., availed of solely for purposes of tax avoidance by artificially overstating basis in the partnership interests of its purported partners . The formation of AD FX Trading 2000 Fund, LLC, the acquisition of any interest in the purported partnership by the purported partner, the purchase of offsetting options, the transfe"r of offsetting options to a partnership in return for a partnership interest, the purchase of assets by the partnership, and the distribution of those assets to the purported partners in complete liquidation of the partnership interests, and the subsequent sale of those assets to generate a loss, all within a period of less than 3 months, had no business purpose other than tax ., avoidance, lacked economic substance, and, in fact an d e' substance, constitutes an economic'sham for federal income i purposes . Accordingly, the partnership and the taxi transactions described above shall be disregarded in full and (1 .) any purported losses resulting from these transactions are not allowable as deductions ; (2) increases in basis of assets are not allowed to eliminate gain ; or (3) increases to the adjusted basis of partnership interests to circumvent the loss limitation of § 704(d) are not allowed for .federal income tax purposes . 3 . It is determined that AD FX Trading 2000 Fund, LLC was a sham, lacked economic substance and, under § 1 .701-2 of the Income Tax Regulations, was formed and availed of in connection with a transaction or transactions in taxable year 2000, a principal purpose of which was to reduce substantially the present value of its partners' aggregate federal tax liability in a manner that is inconsistent with the intent of Subchapter K of the Internal Revenue Code . It is consequently determined that : a . the AD FX Trading 2000 Fund, LLC is disregarded and that all transactions engaged in by the purported partnership are treated as engaged in directly by its purported partners . This includes the determination that the assets purportedly acquired by AD FX Trading 2000 Fund, LLC, including but not limited to foreign currency, -2 1 option .s,rwere acquired- directly by the purported partners . b . the foreign currency option(s), purportedly contributed to or assumed by AD FX Trading 2000 Fund, LLC ., are treated as never having been +( contributed,to or assumed by said partnership and any gains or losses' . purportedly realized by .AD FXIj Trading 2000-Fund, LLC on the option(s)iare' treated as havingbeen realized by its partners : c . the purported"partners of AD FX Trading 2000°Fund, LLC should be treated asi of being partners in A FX Trading 2000 Fund, . LLC ' contributions to AD FX Trading 2000 Fund, LLC will ; be adjusted to reflect clearly the partnership's or purported partners' income . 4 . It is determined that the obligations under the short positions (written call options) transferred to AD FX . Trading 2000 Fund, LLC constitute liabilities for purposes ' of Treasury Regulation § 1 .752-6T, the assumption of which'by AD FX Trading 2000 Fund, LLC shall reduce the purported partner's basisin AD FX Trading 2040 Fund, LLC in the amount of $58,500,000, . . for Michael E . Napoliello,Jr. . but,1 not below the fair market value of the purported partnership] interest . 5 . It is determined that neither AD FXITrading 2000 Fund, LLCI nor its purported partners entered into the option(s) positions or purchase the foreign currency or stock with-a . profit motive for purposes of § 165 ( c)(2) . . 6 . It is determined that, even if the foreign currency option ( s) are treated as having beep contributed to AD FXi1 Trading 2000 Fund , LLC, the amount treated as contributedl!by, the partners under section 722 of the Internal Revenue Code is reduced by the amounts received ! by the contributing partners from the contemporaneous sales of the call option ( s) to the same counter-part y Thus, the basis of the ,' contributed option ( s) is reduced , both in the hands . of the contributing partners and AD FX Trading 2000 Fund, LLC . Consequently , any corresponding claimed increases in the outside basis in AD FX Trading 2000~Fund, LLC resulting fro m the contributions of the foreign currency option( s) are disallowed . 7 . It is determined that the adjusted bases of the long call', . 11 positions (purchased call,options), and other contributions purportedly contributed by the partners to AD FXTrading I 2000 Fund, LLC has not been .established under I .R .C . § 72F3 . i -22- It is consequently determined that the partners of AD FX Trading 2000 Fund, LLC have not established adjusted bases in their respective partnership interests in an amount greater than zero (-0-) : 8 . It is further determined that, in the case of a sale, ,:exchange, or liquidation of AD FX Trading :2000 Fund, LL C partners' partnership interests, neither the purported partnership nor its purported partners have established that the bases of the partners' partnership interests were greater than zero for purposes of determining gain or loss to such partners from the sale, exchange, or liquidation of such partnership interest . I sk.