kenna trading llc jetstream business limited tax_matters_partner et al petitioner sec_1 v commissioner of internal revenue respondent filed date docket nos brazilian retailers purportedly contributed distressed con- sumer receivables to a limited_liability_company s treated a sec_1 cases of petitioners listed in the appendix remain consolidated here- with other petitioners have settled their cases with respondent and therefore their cases have been severed since the trial of these cases kenna trading llc v commissioner a partnership for federal_income_tax purposes s claims carryover bases in these receivables under sec_723 in s in turn contributed some of these brazilian receivables to trading companies and contributed its interest in each trading company to a holding_company s claimed a cost_of_goods_sold for each holding_company equal to the basis of the receivables contributed s then sold an interest in each holding_company to an investor the trading companies claimed bad_debt deductions in s allegedly contributed more of the brazilian receivables to main trusts each main trust then assigned the receivables to a newly created subtrust investors allegedly contributed cash to the main trust in exchange for the beneficial_interest in the subtrust the subtrust claimed a bad_debt deduction asserting that the subtrusts were for federal_income_tax purposes grantor trusts the investors claimed deductions on their tax returns mr rogers the creator of the investment program also invested in such a_trust r disallowed the bad_debt deduc- tions adjusted s’ income for alleging that s inflated its cost_of_goods_sold determined that s failed to include all items of income in its gross_receipts for and and disallowed s’ business_expense deductions r also determined sec_6662 gross_valuation_misstatement penalties against s the trading companies and mr and mrs rogers sec_6662 accuracy-related_penalties on the amounts of s’ underpayments due to increased gross_receipts for unre- ported income and the disallowed deductions and an sec_6662a listed_transaction understatement penalty against s for the taxable_year held the brazilian retailers did not intend to enter into a partnership for federal_income_tax purposes held further s had a cost_basis not a carryover_basis in the receivables held further the transactions in issue lacked economic_substance held further the trading companies are not entitled to sec_166 deductions held further mr and mrs rogers purchased their beneficial_interest in the subtrust and are not entitled to a carryover_basis held further r properly disallowed the rogerses’ claimed sec_166 deduction held further s overstated its cost_of_goods_sold held further r correctly adjusted s’ income to reflect certain unreported deposits held further s is not entitled to the disallowed deductions held fur- ther s and the trading companies are liable for the sec_6662 gross_valuation_misstatement penalty held further s is liable for an sec_6662 and b accuracy-related_penalty on the underpayments attributable to the omitted items of income and the disallowed deductions held further r’s sec_6662a listed_transaction understatement pen- took place united_states tax_court reports alty against s is sustained insofar as related to the income from the trust transactions john e rogers an officer for petitioner jetstream busi- ness limited john e rogers for petitioners john e and frances l rogers ronald s collins jr laurie a nasky and bernard j audet jr for respondent michael d hartigan an officer for participating partners in docket nos and wherry judge in john rogers developed marketed and sold investments which also allegedly provided potential tax_shelter whereby investors in a partnership structure could claim partially_worthless_bad_debt deductions under sec_166 on certain distressed assets formerly owned by a brazilian retailer those transactions did not produce the hoped-for tax benefits for the myriad of reasons outlined in our prior opinions and by the court_of_appeals for the sev- enth circuit see 137_tc_70 supplemented by tcmemo_2012_110 aff ’d 728_f3d_676 7th cir in mr rogers sold the same shelter this time using additional distressed assets of other brazilian retailers that same year congress modi- fied the rules governing the allocation of built-in_loss prop- erty contributed to a partnership rendering the partnership flow-through loss-shifting shelter impotent undeterred for various transactions entered into after date mr rogers selected and used a_trust structure to attempt to gain the same tax benefits for himself and various investor-cli- ents respondent has challenged all of the partially_worthless_bad_debt deductions under sec_166 for the partnership sec_4 all section references are to the internal_revenue_code_of_1986 code as amended and in effect for the tax years at issue and all rule references are to the u s tax_court rules_of_practice and procedure the american_jobs_creation_act_of_2004 ajca pub_l_no sec_833 sec_118 stat pincite amended sec_704 sec_734 and sec_743 effective for transactions entered into after date sec_704 as amended pro- vides that in the case of contributions of built-in_loss_property to a partner- ship the built-in_loss may be taken into account only by the contributing_partner and may not be allocated to a different partner mr rogers used limited_liability companies in these transactions in kenna trading llc v commissioner involved in the tax_year as well as for mr rogers and his wife frances rogers who claimed a sec_166 deduc- tion on their individual tax_return for using the trust variant we consolidated the rogerses’ case with the partner- ship cases for the purpose of resolving only the sec_166 deduction issue in that case respondent also challenged certain aspects of the and partnership returns of sugarloaf fund llc sugarloaf the common ancestor in the many-branched family tree of partnerships and trusts through which inves- part because they are treated as partnerships for federal_income_tax pur- poses see sec_301_7701-3 proced admin regs we refer to them as such one partnership zurichsee trading llc docket no claimed a sec_166 deduction on its federal_income_tax return and respondent issued a notice of final_partnership_administrative_adjustment fpaa for this year mr rogers on brief asserts that his wife is entitled to innocent spouse relief we did not try this issue and do not decide it here we likewise do not decide whether respondent properly determined penalties against the rogerses along with mr rogers gary r fears petitioner in docket no invested in the trust structure in as with the rogerses’ case we consolidated mr fears’ case solely for the purpose of resolving the sec_166 deduction at issue there although mr fears and respondent have entered into a stipulation of settled issues concerning the deficiencies in his case the sec_6662 and h and 6662a penalties allegedly flowing from those deficiencies which themselves stem from the sec_166 deduction’s disallow- ance remain in dispute mr fears’ case remains consolidated for purposes of this opinion because our redetermination in this partnership-level pro- ceeding of penalties determined against sugarloaf could potentially affect mr fears notwithstanding that he held an interest in a lower tier entity see sec_6226 united_states v woods u s ll ll 134_sct_557 holding that tefra gives courts in partnership-level proceedings jurisdiction to determine the applicability of any penalty that could result from an adjustment to a partnership_item even if imposing the penalty would also require determining affected or nonpartnership_items such as outside_basis mr fears resides in st louis missouri which lies within the jurisdiction of the u s court_of_appeals for the eighth circuit before woods that court_of_appeals held in the context of a gross_valuation_misstatement penalty determined against a sham_partnership that outside_basis is an affected_item that must be deter- mined at the partner level before a penalty determined at the partnership level may be imposed see 729_f3d_869 rev’g and remanding 137_tc_220 thus as stated in our order of date we intend to return mr fears’ case to the general docket after issuance of this opinion united_states tax_court reports tors in mr rogers’ shelters claimed tax losses first respondent alleges that sugarloaf overstated its cost_of_goods_sold for and on account of inflated tax bases of sold partnership interests in addition after concessions respondent alleges adjustments to sugarloaf ’s partnership income due to alleged underreported income of dollar_figure and dollar_figure for the and taxable years respectively respondent also disallowed a number of sugarloaf ’s claimed deductions amounting to dollar_figure for the tax_year and dollar_figure for the tax_year as unsubstantiated respondent determined against sugarloaf for each tax_year a sec_6662 and h penalty for a gross_valuation_misstatement a sec_6662 penalty on the amount of the underpayment attributable to each year’s disallowed deduc- tions and a sec_6662a penalty for understatements attributable to undisclosed reportable or listed transactions against the lower tier_partnerships whose cases were tried with sugarloaf ’s respondent determined penalties under sec_6662 and h due to gross_valuation_misstatements and sec_6662 and b and penalties due to negligence substantial understatements of income_tax and substantial valuation misstatements jetstream as tax_matters_partner for sugarloaf and each of the other partnerships whose cases we consolidated with sugarloaf ’s for trial petitioned this court for readjustment of partnership items and redetermination of penalties in this opinion we resolve whether jetstream and the brazilian retailers formed a bona_fide partnership for fed- eral income_tax purposes for purposes of servicing and col- lecting distressed consumer receivables owed to the retailers whether the brazilian retailers made valid contributions of the receivables to the purported partnership under sec_721 whether the retailers’ claimed contributions to and subsequent redemptions from sugarloaf should be collapsed respondent and jetstream business limited jetstream sugarloaf ’s tax_matters_partner entered into a stipulation of settled issues reducing the unreported income from dollar_figure for and dollar_figure for to the amounts stated above jetstream was represented in this litigation by its officer mr rogers who also represented himself and his wife in their consolidated individual tax case throughout this opinion we frequently refer to petitioners whether jointly or individually simply as mr rogers kenna trading llc v commissioner into a single transaction and treated as a sale of the receiv- ables such that the receivables had a cost_basis under sec_1012 rather than a carryover_basis under sec_723 whether the partnership transactions had economic_substance whether the partnership transactions satisfied the statutory prerequisites for a sec_166 deduc- tion whether the trust transactions should be col- lapsed into sales or lacked economic_substance such that mr and mrs rogers’ trust investment would not entitle them to a sec_166 deduction for whether sugarloaf understated gross_income for the and tax years whether sugarloaf is entitled to various deductions for the and tax years whether sugarloaf and the other partnerships are liable for sec_6662 penalties and whether sugarloaf is liable for the sec_6662a penalty we hold for respondent on all issues findings_of_fact the parties’ stipulation of facts supplemental stipulation of facts and second supplemental stipulation of facts all with the facts found from the accompanying exhibits are incorporated herein by this reference as are all stipulations of settled issues filed in various of these consolidated cases the parties have stipulated that venue for appeal would be the court_of_appeals for the seventh circuit i the mastermind john e rogers the central individual in these cases is john rogers during the years at issue mr rogers was a partner at the chicago-based law firm seyfarth shaw as we have pre- viously found mr rogers with regard to sugarloaf our analyses and holdings as to questions - represent alternative reasons all of which when applied result in the same ultimate tax result similarly with regard to the trust shelter we offer alternative analyses and holdings on question petitioners objected to a number of the stipulations and stipulated ex- hibits on the grounds of relevance according to fed r evid r evi- dence is relevant if a it has any tendency to make a fact more or less probable than it would be without the evidence and b the fact is of con- sequence in determining the action we find the stipulations and stipu- lated exhibits relevant and consequently overrule petitioners’ objections united_states tax_court reports started his professional career in at the now-dissolved accounting firm arthur andersen where he rose through the ranks to eventually become an equity partner mr rogers left arthur andersen in and went to work for a startup medical device company called reddy laboratories the venture failed after the food and drug administration denied the company’s application_for a license in mr rogers joined fmc corp a dollar_figure billion company with operations in over countries mr rogers served as fmc corp ’s director of taxes and assistant treasurer through in mr rogers became an equity partner in altheimer gray a full-service law firm headquartered in chicago illinois with offices in eastern europe altheimer gray dissolved in and mr rogers joined the seyfarth shaw llp seyfarth shaw law firm in july of that year mr rogers left seyfarth at the end of date when he opened his own firm rogers associates superior trading llc v commissioner t c pincite mr rogers during or before conceived a plan that he contended would successfully invest in and manage dis- tressed retail consumer receivables overseas and remit the proceeds to the united_states he used a tiered_partnership structure in and most of and a tiered trust struc- ture in and to sell interests to individual investors mr rogers contended the business would profit through aggressive collection efforts translation gain from currency speculation and a planned initial_public_offering the first step under this plan was for brazilian retailers to contribute receivables to a limited_liability entity controlled by mr rogers which for u s tax purposes would accede to the tax basis of the retailers in the consumer debt in he used a limited_liability_company called warwick trading llc to purchase receivables from lojas arapua s a arapua a brazilian retailer of household appliances and consumer electronics in he used a different limited_liability_company sugarloaf to which two other brazilian retailers globex utilidades s a globex and companhia brasileira de distribuic a o cbd also contributed dis- tressed accounts_receivable for interests in that company in sugarloaf contributed a tranche of those assets to other limited_liability companies trading companies sugarloaf then contributed most or all of its interest in the trading companies to yet other limited_liability companies holding_companies in sugarloaf contributed assets to trusts main trusts which each created another trust subtrust the main trust assigned the beneficial interests of the receiv- kenna trading llc v commissioner investimentos ables in the subtrust to an investor who contributed money to the main trust in both years sugarloaf and the trading companies entered loan management and servicing agree- ments with a british virgin islands company called multicred investments limited and or a brazilian company called multicred renato mazzucchelli and jennifer dowek were both intimately involved in the management and operation if not also the ownership of these companies while the parties dispute the significance of these two companies and mr rogers alleges that the british virgin islands company engaged in some sort of scheme to defraud such a dispute is irrelevant to these cases and we find that for practical purposes the companies are the same and refer to them interchangeably as multicred limitada mr rogers formed sugarloaf through entities he owned and controlled he was the sole owner of an s_corporation portfolio properties inc ppi which owned jetstream at that time a british virgin islands company on date mr rogers through jetstream formed sugarloaf a delaware limited_liability_company according to the oper- ating agreement jetstream was the initial manager on date mr rogers sent an engagement letter to mr mazzucchelli as managing member of sugarloaf by which sugarloaf agreed to retain seyfarth shaw as its legal counsel in august mr rogers represented to seyfarth shaw that the owners of sugarloaf were mr mazzucchelli and ms dowek he never disclosed jetstream’s ownership which was at that time ii the receivables the brazilian connection a arapua on date sugarloaf and arapua entered into a con- tribution agreement by which arapua agreed to contribute distressed consumer receivables with an outstanding balance of rdollar_figure to sugarloaf in exchange for a member- ship interest sugarloaf later disposed of these receivable sec_11 when we refer to receivables of the three brazilian retailers we refer to checks written by consumers for products brazilian companies at the time generally lacked sufficient purchase-with-financing installment_sales continued united_states tax_court reports in a transaction not necessarily at issue in these cases mr rogers signed this contribution agreement as manager of sugarloaf b globex in date sugarloaf entered into a contribution agree- ment with globex a consumer-goods retailer doing business under the name ponto frio according to the contribution agreement globex contributed receivables with an out- standing balance of rdollar_figure in exchange for a membership interest in sugarloaf mr rogers signed this agreement as manager of sugarloaf the parties provided three versions of the contribution agreement a portuguese version a certified english trans- lation of that version and the english version provided by mr rogers a cursory comparison of the certified english translation and mr rogers’ version reveals that mr rogers’ and the portuguese versions are not reliable translations of one another one difference is that according to the certified english translation sugarloaf represented that it is aware that for purposes of brazilian law taxes were lowered for accounting and tax purposes for the majority of the tax_credits of most objects of this instrument although it had not been lowered for the purpose of american law the version facilities and in lieu thereof had the practice of extending credit to con- sumers whereby the consumer would write a series of postdated checks and the retailer would deposit those checks on the appropriate day the receivables in these cases are distressed meaning that they are past due the average age of the sampled receivables as of the date of contribution to sugarloaf wa sec_5 years in the case of cbd and years in the case of globex the contributed receivables’ value in brazilian reais was not stated in the cbd contribution agreement but was to be provided in a schedule i to the agreement however no schedule i was attached to the translated version of the agreement mr rogers placed in evidence and submitted to the court the same was true of the translated globex con- tribution agreement offered by mr rogers discussed infra p according to the arapua contribution agreement arapua already owned of sugarloaf the transfer of a interest to globex is a mathematical impossibility and as discussed infra pp cbd en- tered a contribution agreement whereby it ostensibly received a mem- bership interest mr rogers contends that the subsequent contribution agreements merely diluted the previous ownership but these numbers cannot be reconciled and they support our finding see infra pp that the parties did not intend to form a partnership kenna trading llc v commissioner provided by mr rogers lacks identical or even analogous lan- guage mr rogers’ version of the contribution agreement pur- ported to have attached an exhibit a which set forth all of the receivables contributed the certified english translation included an annex i which stated in part the data related to the credits are recorded on a cd-rom delivered in this act by globex to the fund sugarloaf the parties stipu- lated that neither exhibit a nor the media referenced in annex i were attached to the agreements one of the individuals promoting the shelter for mr rogers michael hartigan sent money in to multicred which passed on a portion of that money to globex as indicated in a date email from ms dowek to mr rogers these payments were in mr rogers’ own words constructive distributions from warwick or sugarloaf in mr hartigan sent money received from the investors less his fees directly to the credit of the trusts at some point globex requested a partial_redemption of its membership interest initially globex requested a partial_redemption and apparently later requested a larger or complete redemption in the spring of ms dowek sent two emails to mr rogers telling him that globex needed documentation showing the sale of its interest in sugarloaf on date mr rogers wired dollar_figure to a bank account in the name of globalstores s a a week or so later ms dowek wrote the following to mr rogers bought more from globex global store so please send dollar_figurek instead of dollar_figurek mr rogers agreed and on date wired an additional dollar_figure to the account of globalstores s a further correspondence between mr rogers and the various parties involved in these transactions demonstrates an intent to redeem globex out of sugarloaf in date mr rogers expressed concerns to multicred that globex never transferred the distressed assets to sugarloaf he asked multicred for proof of a transfer before which was when collections on the globex receivables began the parties stipulated that globex retained custody of the receivables until at least date see infra pp united_states tax_court reports c cbd in the fall of sugarloaf and multicred were negoti- ating the acquisition of receivables from another brazilian retailer cbd a large supermarket chain in brazil which operated some stores under the brand name pa o de ac u car early drafts of agreements from multicred indicate that as of date sugarloaf and cbd intended to enter into a purchase-sale agreement on date sugarloaf and multicred entered into a contribution agree- ment with cbd once again there are several versions of this contribution agreement one copy in portuguese a cer- tified english translation of the portuguese version and an english-language version provided by mr rogers while from their cover pages the portuguese version and mr rogers’ version appear to be translations of one another a cursory examination of the format of the body of the agree- ment in each version quickly reveals that they are not accurate translations the certified english translation only confirms that mr rogers’ version and the portuguese version are different documents the certified translation and mr rogers’ version both state that cbd received a membership interest in sugarloaf in exchange for a contribution of receivables con- tracts mr rogers’ version indicates that the subject receiv- ables contracts are listed in schedule i which itself refers to an attached diskette although apparently mr rogers never received a copy while the certified translation includes an annex i which references a contemporaneously delivered cd-rom and provides a detailed key to the data supposedly contained thereon mr rogers’ version and the certified translation both state that the receivables had an outstanding balance of rdollar_figure only the certified translation however discloses that the value of these receiv- ables was rdollar_figure further according to the certified translation the portuguese document is an agreement between cbd sugarloaf with mr rogers signing as man- ager and multicred with mr mazzucchelli signing on its behalf mr rogers’ version however is an agreement between only cbd and sugarloaf with mr rogers again the parties often refer to cbd as cbd pda or pda for convenience we use cbd kenna trading llc v commissioner signing as manager finally mr rogers’ version contains a representation by cbd that it had not taken action with respect to the receivables that would constitute a charge-off under sec_166 the certified translation contains no such representation sugarloaf cbd and multicred entered the contribution agreement with the understanding that cbd would be redeemed out for cash shortly on date sugarloaf loaned multicred dollar_figure pursuant to a promis- sory note according to an date email from mr rogers the dollar_figure was used to redeem out pda multicred then purchased cbd’s interest in sugarloaf for rdollar_figure on date on date multicred assigned its interest in sugarloaf to an entity called sugarloaf sugarloaf limitada which was owned by sugarloaf and controlled by mr rogers in exchange for sugarloaf limitada’s assumption of the obligations to sugarloaf under the dollar_figure promis- sory note sugarloaf through mr rogers was a party to this agreement on date sugarloaf limitada sold the interest in sugarloaf back to sugarloaf and it paid off three-quarters of the promissory note mr rogers signed this agreement on behalf of both sugarloaf and sugarloaf limitada sugarloaf limitada paid the remaining balance due on the note in the sugarloaf purchase agreement refers to these transactions as stage or stages investimentos limitada in addition the record contains hints that a shadow invest- ment group may have been involved in the purchase of the cbd receivables an email from ms dowek says w e will have four or five investors purchasing their cbd’s interest and multicred will act as agent for them additional documents implicate an entity named sugarloaf overseas ltd sugarloaf overseas in this shadow investment group it received dollar_figure million from sugarloaf as payment for assets on or about date mr rogers repeatedly denied knowing sugarloaf overseas and claimed that he could remember no reason why sugarloaf would have made the dollar_figure million transfer we do not credit his testimony and believe that mr rogers knew at the time what sugarloaf oversea sec_15 pda and cbd are one and the same see supra note united_states tax_court reports was and also what its role was however murky to us in the cbd buyout d collections as mentioned collections on the globex receivables did not begin until at the earliest as for the other receivables multicred did not have collection data available for mr rogers therefore used rdollar_figure or about usddollar_figure as the collections reported for each investor in e valuation and performance sugarloaf received valuations for the cbd and the globex receivables from financial management control ltda fmc both these letters were dated date but the parties stipulated that sugarloaf did not receive the let- ters until the letters are almost identical the fmc letter for globex opined that the fair_market_value of the receivables which had an average age of six to seven years and average balance of rdollar_figure was of the notional face value amount fmc concluded that the cbd receivables had an average age of three years and average balance of rdollar_figure and were also worth of the notional face value amount these appraisal letters bear a remarkable similarity to an appraisal letter written by a company called lourenc o assessoria e recuperadora de cre dito ltda larc for war- wick the larc appraisal letter purported to appraise arapua receivables at again of the notional face value amount at the trial and without objection respondent offered john d finnerty as an expert in valuation of fixed income invest- ments the court accepted dr finnerty as such an expert and received his report into evidence dr finnerty used a discounted cashflow method which took into account similar assets expected net cashflow and the collection expenses at the time of acquisition he concluded that the globex receiv- ables had a fair_market_value of at most of the notional face value amount and that the cbd receivables had a fair_market_value of at most of the notional face value amount dr finnerty also dismissed the fmc valuations as being internally inconsistent and containing flawed reasoning for example the fmc valuations purport to use the comparables kenna trading llc v commissioner method the replacement method and the discounted cashflow method to arrive at the figure but the letters state that the comparables method yields a to valu- ation and the replacement method yields a valuation for the cbd receivables and a valuation for the globex receivables the letters do not discuss a specific value deter- mined using the discounted cashflow method and why such a method would result in higher valuations so it is not clear how fmc arrived at the valuations furthermore the fmc letters purport to affirm the discounted cashflow anal- ysis provided by multicred without mentioning what valu- ation that method yields finally fmc fails to explain why it gave identical valuations to two sets of receivables despite significantly different characteristics such as the age and average balance per account of the receivables the court is left to assume that the dollar_figure higher average balance of the globex receivables exactly balanced out the fact that their average age was three to four years older than the cbd receivables so that each group was worth of face at trial and without objection the court accepted respond- ent’s witness martin d hanan as an expert in business valu- ation and received his report into evidence mr hanan’s extensive report opined as to the expected and actual pretax and after-tax rates of return from the investments at issue in these cases he reviewed the amounts paid_by investors the collections allegedly made and other data he concluded that an after-tax rate of return was positive only because of the tax_benefit afforded by the sec_166 deduction mr hanan concluded that the exorbitant fees and the exchange rate at the time of the origination of the receivables contrib- uted heavily to the negative pretax rates of return only mr hartigan’s investment on his own behalf stood a chance of realizing a profit because mr hartigan waived his own fee mr hannan concluded that a reasonable investor would not have invested in this transaction but for the tax_benefit the court does note that mr hannan’s analysis assumes a con- stant exchange rate of dollar_figure brazilian reais to the u s dollar mr rogers with some reasonable basis for his conclusions believed the brazilian real was undervalued and would appreciate vis-a-vis the dollar within a reasonable invest- ment period investors may have thought likewise united_states tax_court reports f other problems with the receivables at trial and without objection the court accepted respond- ent’s witness sergio tostes as an expert in brazilian commercial taxation law mr tostes reported that the con- tribution agreement between globex and sugarloaf was illicit under brazilian law because it purported to assign a interest in sugarloaf to globex according to mr tostes because arapua already owned a interest the globex contribution agreement was legally impossible mr tostes opined that the cbd agreement is similarly invalid under brazilian law iii the partnership structure your dad’s tax_shelter the partnership shelters essentially mirror the dis- tressed asset debt or dad shelter structure we described in superior trading llc v commissioner t c pincite- a the typical structure mr rogers typically structured the shelters as fol- lows jetstream and sugarloaf would create a trading com- pany an illinois limited_liability_company with jetstream contributing a nominal amount of cash eg dollar_figure for a membership interest and sugarloaf contributing distressed assets the contribution agreement between sugarloaf and the trading company would state that sugarloaf was contrib- uting a portfolio of notes the contribution agreement would also state that exhibit a would set forth the notes contrib- uted but this exhibit was never prepared for any of the transactions jetstream and sugarloaf would then form a holding com- pany also an illinois limited_liability_company with jet- stream contributing a nominal amount of cash for a interest and sugarloaf contributing a interest in a trading company in exchange for a interest next in its reply brief pincite jetstream states the schedules were pre- pared and were provided to irs internal_revenue_service auditors mazzucchelli retained the original version this contention directly con- tradicts paragraph of the parties’ trial stipulation which states in part exhibit a to the contribution agreements between sugarloaf and each trading company was never prepared to the extent that jetstream’s objection requests to be relieved of the stipulation we reject that request kenna trading llc v commissioner sugarloaf would sell its interest or in some cases a interest in the holding_company to an investor two individuals marketed the sugarloaf transactions for mr rogers mr thomas agresti and mr hartigan the investor would pay a percentage of the u s dollar notional amount of the receivables and the size of that percentage depended on whether the investor purchased the interest through mr hartigan or mr agresti jetstream would retain a interest in each trading company and each holding_company and would act as tax_matters_partner for both companies sugarloaf would retain a interest in each trading com- pany and for the most part in each holding_company numerous iterations of this sequence took place the investors’ contribution agreements incorrectly stated the value of the outstanding balance of the receivables contributed for instance the bielersee contribution agree- ment states that sugarloaf contributed assets with an out- standing balance of rdollar_figure but on its form_1065 u s return of partnership income bielersee reported a sec_166 loss of dollar_figure or of dollar_figure that amount in brazilian currency would be greater than rdollar_figure in any event the amount contributed to the partnership depended on the size of the tax deduction the investor sought generally mr agresti’s clients paid of the u s dollar notional amount while mr hartigan’s clients paid of those amounts between and went to sugarloaf or ppi as the purchase_price of the receivables another to represented an amount retained by sugarloaf for professional and operating_expenses mr rogers gave discounts to his two promoters mr hartigan paid only to sugarloaf to buy into the shelter and mr agresti paid like the percent- age paid the source of the receivables also depended on it is not always clear how much of an interest sugarloaf retained in a particular holding_company the parties stipulated that sugarloaf re- tained for the most part a interest in each holding_company jet- stream on brief contends that sugarloaf retained no interest in a holding_company the documentary_evidence is similarly contradictory for exam- ple in the case of bielersee trading llc bielersee sugarloaf purported to contribute a interest in bielersee to alber fund llc alber in exchange for a membership interest in alber sugarloaf then pur- ported to sell its entire interest in alber to the investor rd3j ltd united_states tax_court reports whose client the investor was for mr agresti’s clients sugarloaf contributed cbd receivables for mr hartigan’s clients sugarloaf used globex receivables the formation of r b taylor trading llc r b taylor is an exception from the general pattern the documents indicate that warwick on date contributed the receivables to r b taylor in exchange for membership interests that warwick on date contributed of r b taylor to a holding_company chipping wood fund llc and that warwick then sold of the holding com- pany on date to the investors russell and betsy taylor r b taylor claimed a sec_166 bad_debt_loss of dollar_figure in a document purporting to be an inven- tory of receivables transferred to and owned by r b taylor lists globex receivables which warwick did not have the investor was a client of mr hartigan’s we find that to the extent there was a partnership formed sugarloaf not war- wick was the initial contributing entity in addition to a contribution agreement each investor also had to enter into a subscription agreement this agreement allowed the investor to establish sufficient tax basis in the partnership_interest to claim the deduction flowing from the anticipated sec_166 bad_debt charge-off the amounts of the subscription agreements were generally the same as the u s dollar notional amounts of the receivables less any pur- chase price paid some investors used promissory notes in favor of sugarloaf to obtain the necessary tax basis in their partnership interests b the music stops in date congress passed the american jobs cre- ation act of ajca pub_l_no sec_833 sec_118 stat pincite which sharply curtailed the tax benefits of the partnership structure used by mr rogers and sugarloaf in by amending sec_704 sec_734 and sec_743 the relevant provisions had an effective date of date mr rogers determined that if an investor signed a letter of intent to purchase a partnership_interest before that date we are disappointed that the parties did not provide the court with a complete rather than a partial copy of r b taylor’s partnership re- turn which could have assisted the court with this finding of fact kenna trading llc v commissioner the partner would still be entitled to deduct the built-in losses from subsequently contributed receivables in addition if a potential investor signed a letter of intent but then backed out of the deal mr rogers determined that a new investor could be substituted for the original investor despite not having signed a letter of intent before the effective date of the ajca c the underlying investors most of the individual investors in these partnerships have settled the underlying tax_liability issues in some cases the investors filed notices of election to participate under sec_6226 and rule b in the tax_court cases for the trading companies in which they indirectly invested most of these investors have settled and have entered into stipula- tions of settlement with respondent but these stipulations settle these trading company cases only as to the distributive shares of the settling partners furthermore mr hartigan remains an officer for participating partners in four cases at trial mr rogers mr hartigan and respondent disagreed as to the proper tax_matters_partner of knight trading llc docket no we asked the parties to submit status reports on this subject and only respondent submitted the requested report mr hartigan did not produce any docu- mentation showing that paragon fund llc replaced jet- stream as the tax_matters_partner of knight trading and in the absence of other evidence jetstream is the proper tax_matters_partner in addition windmere fund llc as tax_matters_partner for ironwood trading llc docket no and respondent have entered into a stipulation of settled issues as to windmere fund’s partnership items jetstream initially filed the petition on behalf of ironwood trading windmere respondent and the following participating partners entered into stip- ulations of settled issues robert greer participating partner in docket no joel r baker participating partner in docket no rus- sell c taylor participating partner in docket no mark herbert participating partner in docket no michael koretsky partici- pating partner in docket no and thomas turner participating partner in docket no united_states tax_court reports was subsequently substituted as the tax_matters_partner because jetstream initially filed the petition and retains a interest in ironwood we treat jetstream as a partici- pating partner in these cases likewise respondent and arrowhead fund llc as tax_matters_partner for murtensee trading llc docket no entered a stipulation of settled issues as to arrowhead fund’s partnership items again jetstream was the tax_matters_partner at the time the petition was filed and we treat jetstream as a partici- pating partner in these cases finally two participating investors have not yet settled jonathan greer participating as the ultimate investor in grey stone trading llc docket no and scott ray participating as the ultimate investor in thornhill trading llc docket no they did not appear at trial and have waived any right to participate therein d returns and adjustments in sugarloaf entered into at least investment deals using the tiered_partnership structure described above and distressed assets from globex and cbd the trading companies in these deals all filed forms which were prepared by an employee of mr rogers jonathan gabel and signed by mr rogers and all claimed sec_166 deductions respondent issued fpaas in these cases denying the fol- lowing deductions partnership name bad_debt deduction sec_166 bielersee trading llc bodensee fund llc connemara trading group llc cumnor group llc davis fund llc dent-blanche fund llc essex fund llc grey stone trading llc dollar_figure big_number big_number big_number big_number big_number big_number big_number participating partner lancer a barton represents that he is ironwood trading’s majority member through one or more pass-through entities in- cluding windmere in which he holds at least a majority interest participating partner christopher h brown represents that he is murtensee trading’s majority member through one or more pass-through entities including arrowhead in which he holds at least a majority inter- est kenna trading llc v commissioner partnership name bad_debt deduction sec_166 grand-combin fund llc harlan fund llc ironwood trading llc kenna trading llc knight trading llc lakeview trading llc larkspur trading llc lyman trading llc monte rosa trading llc murtensee trading llc northgate trading llc ofenpass fund llc remington trading llc ridgeway trading llc riversedge fund llc saddlebrook trading llc suten fund llc r b taylor trading llc thornhill trading llc turnberry trading llc warner fund llc zugersee trading llc zurichsee trading llc big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number total big_number most trading companies claimed the deduction for riversedge fund llc riversedge claimed a dollar_figure deduction for and a dollar_figure deduction for zurichsee trading llc claimed the deduction for zugersee trading llc claimed a dollar_figure deduction for and a dollar_figure deduction for warner fund llc claimed a dollar_figure deduction for in most cases the trading company claimed a deduction equal to of the u s dollar notional value of the receiv- ables in other cases the investor requested that a smaller deduction be used for that tax_year respondent timely issued notices of final_partnership_administrative_adjustment fpaa to all trading companies disallowing their claimed sec_166 losses respondent also adjusted to zero deduc- we note that riversedge’s tax_return is not in the record we in- stead rely on the fpaa issued for that year warner fund llc also claimed a dollar_figure deduction on its tax_return jetstream’s petition for that year docket no was dis- missed as untimely united_states tax_court reports tions claimed for amortization expenses and collection expenses petitioners in these partnership cases timely filed petitions for review of the partnership adjustments iv the trust structure dad because congress in late essentially eviscerated mr rogers’ shelter structure mr rogers moved toward a similar structure that purported to use trusts to reach the same end result in this structure two illinois common_law business trusts a main trust and a subtrust replaced the holding_company and the trading company a the typical structure when an investor agreed to purchase the shelter sugarloaf would form a main trust with mr rogers as trustee and sugarloaf as the initial grantor and beneficiary each trust would have its own bank account controlled by mr rogers sugarloaf would then contribute receivables through a contribution agreement between mr rogers as trustee of the main trust and sugarloaf the contribution agreement would include a schedule a stating see cd rom disk attached hereto describing the issuer name date_of_issuance outstanding amount and other relevant data no such media would be attached the investor would purchase a beneficial_interest in the main trust sugarloaf and mr rogers would then create a subtrust allocate the receivables to the subtrust and des- ignate the investor as the beneficiary the investor would also receive a series 2005-a beneficial_interest certificate granting a interest in the rights to the receivables in the trust investors in the trust structure usually paid between and of the notional value of the receivables which was also the tax basis eventually claimed plus fees charged by the promoters to obtain their subtrust interests the pur- chase money went into the main trust’s bank account but jetstream through its director mr rogers filed petitions for them as their tax_matters_partner for the transactions the investors appear to have paid approxi- mately of the notional value of the receivables plus other fees other evidence in the record suggests that for transactions in subsequent tax years the purchase_price was kenna trading llc v commissioner over the course of and these amounts were essentially transferred to sugarloaf even though the pur- chase money went into the bank account mr rogers estab- lished for the main trust the parties to the transaction viewed the transaction as a purchase and not a contribution of money to a_trust account for example most investors signed an agreement for purchase of trust beneficial_interest the compliance booklets which investors received and signed cast the transaction as a purchase of a beneficial_interest in the main trust the investors pursuant to the agreements creating the subtrusts had the power to transfer the certificates of bene- ficial ownership the only apparent restriction was that an investor had to give notice to the trustee furthermore an investor could at any time choose to revoke and terminate the subtrust in which that investor had acquired an interest during the revocation and termination the investor was entitled to direct the disposition of the subtrust assets mr rogers prepared and filed for each main trust and each subtrust a form_1041 u s income_tax return for estates and trusts the returns indicated that each subtrust was a grantor_trust and attached grantor information state- ments these statements indicated that the investors were the grantors and listed amounts for collection income collec- tion expenses fiduciary expenses legal expenses and sec_166 deductions the main trusts’ returns indicated that the investors were the beneficiaries and reported no gains or losses respondent issued notices of deficiency to the subtrust investors some of these investors petitioned the court for redetermination we consolidated some of those cases for trial at the same time as the partnership and sugarloaf cases all but mr and mrs rogers and gary r fear sec_26 have settled with respondent and we have since severed those other individual tax cases from this group b sterling ridge trust mr and mrs rogers invested in the sterling ridge a subtrust through an s_corporation wholly owned by mrs rogers sterling ridge inc mr rogers was president of see supra note united_states tax_court reports sterling ridge sugarloaf contributed receivables to sterling ridge trust with a claimed tax basis of dollar_figure million sterling ridge trust allocated these receivables to the sterling ridge 2005-a subtrust sterling ridge inc pur- chased the beneficial_interest in sterling ridge 2005-a subtrust for dollar_figure sterling ridge inc sent the purchase money to the heritage bank account of the sterling ridge trust over the course of date dollar_figure was withdrawn from this bank account mr rogers filed form sec_1041 for the main trust and the subtrust for the tax years and on the subtrust’s form_1041 he attached a grantor information state- ment stating that sterling ridge inc was the grantor this statement also listed collection income of dollar_figure collection expenses of dollar_figure a fiduciary expense of dollar_figure a legal expense of dollar_figure and a sec_166 expense of dollar_figure on its form_1041 the subtrust reported collecting dollar_figure of income and a collection expense of dollar_figure sterling ridge inc on its form_1120s u s income_tax return for an s_corporation prepared by mr rogers reported a loss of dollar_figure almost entirely attributable to the dollar_figure sec_166 deduction mr and mrs rogers reported this loss on their tax_return which they both signed respondent timely issued a notice_of_deficiency for disallowing among other determinations the sec_166 deduction that flowed through from sterling ridge mr and mrs rogers timely petitioned this court for redeter- mination v the sec_166 deduction aggregate and arbitrary at no point did the participants in these transactions con- duct any kind of study as to which of the receivables should be written down the individual receivables were not charged off individually mr gabel’s handwritten notes after a meeting in brazil reflect the reality that multicred lacked the resources to conduct a writeoff study at one point statistical sterling ridge did not report the collection expense or the fiduciary ex- pense from the grantor information statement and it is not clear whether the legal expense and the collection income were included on its return kenna trading llc v commissioner sampling was discussed but such a sampling was never done vi the hub searching for sugarloaf a uncertain ownership evidence as to the purported owners of sugarloaf is con- tradictory the three principal sources all provide conflicting information first contribution agreements suggest that jet- stream owns a interest in sugarloaf arapua owns a interest in sugarloaf globex owns a interest in sugarloaf and cbd owns a interest in sugarloaf second sugarloaf ’s quickbooks balance_sheet for lists barnard citco nv mr rogers and teviot as having equity interests in sugarloaf the yearend balance_sheet shows the same equity owners the yearend bal- ance sheet reflects that the following entities and persons owned equity in sugarloaf barnard citco nv mr rogers multicred sugarloaf overseas and teviot mr rogers testi- fied that barnard citco nv and teviot all made equity investments in sugarloaf he also stated that the balance sheets with the yearend balance_sheet time-stamped date reflected only equity deposits that had been recorded up to that point and that the equity portion of the balance sheets was irrelevant third and finally schedules k-1 partner’s share of income deductions credits etc filed with sugarloaf ’s and tax returns claimed that jetstream was a capital and profit and loss owner warwick a capital and profit and loss owner cbd a capital and profit and loss owner and globex a capital and profit and loss owner additional evidence provides no clarity with respect to teviot and barnard a date email from mr mazzucchelli to mr rogers lists investors in sugarloaf these investors were andrew barnard for dollar_figure teviot investments ltd for dollar_figure and warwick for dollar_figure sugarloaf ’s bank accounts show wire transfer deposits in according to mr rogers teviot is teviot investments ltd a com- pany related to mr mazzuchelli and barnard is mr mazzuchelli’s father- in-law somewhat surprisingly the voluminous record in these cases af- fords no meaningful information about citco nv united_states tax_court reports date from teviot and barnard in the amounts of dollar_figure and dollar_figure respectively a fax from ms dowek to mr rogers suggests that sugarloaf overseas was due dollar_figure on behalf of a pda investor group for acquisition of notes emails among the parties suggest that teviot and barnard were involved along with multicred and mr rogers in the purchase of the cbd assets mr rogers also states that sugarloaf overseas received a dollar_figure million payment for the sale of cbd receivables having a dollar_figure notional face value b adjustments to income respondent used the specific item method to reconstruct sugarloaf ’s income for the and tax years through a bank_deposits analysis the only deposits remaining in dis- pute for the tax_year are date total source teviot investments ltd andrew a barnard amount dollar_figure big_number big_number mr rogers testified that these amounts represented equity investments he also that mr mazzucchelli approached him in demanding repayment of money mr barnard sent to sugarloaf testified respondent also alleges that the following deposits in constitute gross_income to sugarloaf date description1 unknown-deposit from ppi multicred unknown-deposit from ppi kevin walzter unknown-sterling ridge m-d medical services betacom inc sugarloaf overseas orchard financial group llc capital preservation services co trust amount dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number kenna trading llc v commissioner date total description1 amount big_number the description column is gleaned from the bank state- ments where the bank statements are missing or not helpful we use unknown followed by for demonstrative purposes the description or source as listed in sugarloaf ’s quickbooks reconciliation this is not a finding that these are necessarily the sources of the deposits because we do not believe the quickbooks data alone is a sufficiently reli- able indicator of sugarloaf ’s items of income and loss with respect to the date dollar_figure deposit the par- ties provided a customer receipt evidencing a deposit in that amount but it does not otherwise identify a source also in the record are handwritten notes stating that the july sugarloaf bank statement is missing and purporting to show that the dollar_figure deposit was from jer the sugarloaf quickbooks bank account reconciliation records the deposit as a deposit from ppi a c the date dollar_figure deposit is reflected on sugarloaf ’s bank statement as a wire transfer from multicred the quickbooks reconciliation also records this amount as a deposit from multicred the bank account statement for sugarloaf does not list any detail beyond deposit for the dollar_figure date deposit the quickbooks reconciliation describes this deposit as a deposit from ppi and or mr rogers the bank account statement describes the dollar_figure date deposit as a wire transfer from kevin waltzer the quickbooks reconciliation describes this deposit as customer deposits retainers the bank account statement lists no detail beyond deposit for the dollar_figure date deposit the quickbooks reconciliation describes the deposit as a deposit from sterling ridge the bank account statement describes the date dollar_figure deposit as a wire transfer from m-d medical services the quickbooks reconciliation describes this deposit as customer deposits retainers the bank account statement describes the date dollar_figure deposit as a wire transfer from betacom incorporated the wire transfer information sheet lists a ref- erence of betacom trust the quickbooks reconcili- united_states tax_court reports ation describes retainers this deposit as customer deposits the bank account statement describes the date dollar_figure deposit as a wire transfer from sugarloaf overseas the quickbooks reconciliation does not describe this deposit in any meaningful way but does indicate it is a deposit from sugarloaf overseas the bank account statement describes the date dollar_figure deposit as a wire transfer from orchard finan- cial group llc the wire transfer information sheet lists a reference of - lance barton fund - brad black fund the quickbooks reconciliation describes this deposit as deposits from barton big_number and black big_number the bank account statement describes the date dollar_figure deposit as a wire transfer from capital preservation services the wire transfer information sheet lists the same as well as a reference to cps trust the quickbooks reconciliation describes this deposit as cus- tomer deposits retainers the bank account statement describes the date dollar_figure deposit as a wire transfer from co trust the quickbooks reconciliation describes this deposit as from co trust and contains mr rogers’ initials c adjustments to cogs in the fpaa respondent also adjusted sugarloaf ’s reported cost_of_goods_sold on its tax_return sugarloaf reported a cost_of_goods_sold of dollar_figure sugarloaf claimed a cost_of_goods_sold for each holding_company it sold to an investor and took the position that the cost_of_goods_sold was equal to the claimed adjusted_basis in the contributed receiv- ables d disallowed deductions sugarloaf claimed on its and tax returns the fol- lowing miscellaneous deductions the total of the claimed adjusted bases of the receivables in the com- panies at issue in these cases is dollar_figure this amount does not in- clude three transactions which are not part of these cases for which the total claimed adjusted_basis is dollar_figure million kenna trading llc v commissioner deduction legal professional fees management fees consulting fees amortization meals entertainment accounting bank charges computer services office expense trust expense dollar_figure big_number big_number big_number --- --- --- dollar_figure big_number big_number --- big_number big_number big_number big_number total big_number big_number respondent disallowed all deductions petitioner provided quickbooks account records and canceled checks purporting to substantiate the expenses opinion because this opinion disposes of discrete issues see supra pp we first offer a road map for the reader we begin with the big picture in part i we focus on sugarloaf analyzing whether it constitutes a bona_fide partnership for federal_income_tax purposes whether the brazilian retailers made valid contributions to it under sec_721 whether the step_transaction_doctrine should be applied to collapse those claimed contributions and the retailers’ subsequent redemptions into sales such that the receivables had a cost_basis under sec_1012 rather than a carryover_basis under sec_723 whether the partnership transactions had economic_substance and whether the statutory prerequisites for a sec_166 deduc- tion were satisfied we then turn in part ii to whether mr and mrs rogers’ trust investment entitles them to a sec_166 deduction for applying the analysis of part i to the trust structure in which the rogerses invested with respect to sugarloaf and the trust structure we present our analyses and holdings in the alternative we then turn to the details in part iii we consider whether sugarloaf understated gross_income and or is entitled to various deductions for the and tax years in part iv we resolve whether sugarloaf and the other partnerships are liable for the sec_6662 pen- united_states tax_court reports alties and whether sugarloaf is liable for the sec_6662a penalty i superior trading revisited sec_723 states the general_rule that the basis of prop- erty a partner contributes to a partnership is a carryover tax basis which is the same adjusted_basis as it had in the hands of the contributing_partner increased by any gain rec- ognized by the contributing_partner under sec_721 petitioners contend that the distressed unpaid brazilian receivables contributed to sugarloaf had the same tax basis in the united_states as they had in the hands of the bra- zilian retailers and that sec_723 preserved the built-in losses inherent in those receivables under their theory sec_723 continued to operate upon and governed the subse- quent contribution of the receivables to the trading compa- nies petitioners allege that under sec_722 sugarloaf had a basis in each trading company equal to the basis it had in the receivables when sugarloaf contributed the trading com- pany to the holding_company petitioners contend that sugarloaf again under sec_722 obtained a tax basis in its interest in the holding_company equal to its tax basis in the trading company here petitioners contend that tax basis was equal to the tax basis in the underlying receivables and when sugarloaf sold the holding_company it sold it for a fraction of its adjusted tax basis resulting in a cost_of_goods_sold much higher than the purchase_price the investors when they bought their interests in the holding_companies each took a cost_basis but they then inflated their bases in their partnership interests through contributions of cash notes or other_property to the holding_companies thus when a trading company claimed the sec_166 deduction the investor could claim a corresponding flowthrough deduction up to the full amount of his or her basis in the holding_company partnership as this recounting of petitioners’ theory illustrates the whole shelter revolves around the initial contribution of the receivables and the shifting of the built-in_loss from the tax- indifferent brazilian retailer to the tax-sensitive united_states taxpayer investor up until date such shifting was theoretically possible because the inside_basis kenna trading llc v commissioner adjustment of sec_743 was required only if the partner- ship filed an election under sec_754 sec_704 now requires allocation of built-in losses to the partner contributing the built-in_loss_property and only to that partner a sec_743 basis_adjustment is now mandatory upon any transfer of a partnership_interest in a partnership with a substantial_built-in_loss in short the partnership version of the transaction as originally structured by mr rogers clearly no longer worked after date even according to mr rogers’ interpretation of the law thus mr rogers substituted his trust structure we add the caveat concerning mr rogers’ interpretation of the law because for all of the reasons we articulated in superior trading his structures were conceptually flawed very clearly never worked and in any event were never fully implemented in accordance with mr rogers’ design respondent attacks the partnership transactions using a variety of analytical tools he unscrews the partner- ship itself taking the position that sugarloaf was not a valid partnership because the parties did not intend to enter into a partnership nor did the alleged contributions of receiv- ables ever properly occur he next saws through all the steps undertaken by the parties and collapses them into simple sales and purchases of receivables using the heaviest hammer in the toolbox he then smashes the entire trans- action as lacking economic_substance finally large-scale demolition completed he pries apart the sec_166 deduc- tion piece by piece contending that petitioners failed to prove they satisfied the requisite statutory elements a still not a valid partnership as an initial matter we ask whether the retailers and jet- stream formed a partnership whether a valid partnership exists for purposes of federal tax law is governed by federal_law see 337_us_733 superior trading llc v commissioner t c pincite the supreme court directs us to ask ‘whether the part- ners really and truly intended to join together for the pur- pose of carrying on the business and sharing in the profits and losses or both ’ commissioner v culbertson u s pincite quoting 327_us_280 the question is one of fact id pincite united_states tax_court reports sec_301_7701-3 proced admin regs allows a n eligible_entity with at least two members to elect to be classified as an association or a part- nership if no election is made the regulations by default treat an eligible two-or-more-member entity as a partnership sec_301_7701-3 proced admin regs these so-called check-the-box_regulations do not supersede culbertson insofar as the putative members must still come together to form an entity see eg superior trading llc v commis- sioner f 3d pincite applying the tests of culbertson and tower and we do not believe or find that jetstream globex arapua and or cbd came together to form a partnership nothing in the record convinces us that jetstream globex and cbd intended to join together for the purposes of car- rying on a debt collection business everything in the record convinces us that globex and cbd had every intention of dumping their distressed receivables and that jetstream intended to sell a tax_shelter among many other indicators the math in the contribution agreements between sugarloaf and arapua cbd and globex just does not add up according to these agreements the three brazilian retailers own a collective interest in sugarloaf mr rogers would have us believe that with every new contribution agreement the membership interests of the current members were diluted to make room for the new member but he provides no contemporaneous acknowl- edgment or assent from the members of such dilution of their membership interests nor other corroborating evidence their arithmetical flaws aside the contribution agree- ments highlight a second indicator that no partnership was formed they directly conflict with other evidence in the record as to who sugarloaf ’s purported partners even were arapua cbd and globex executed contribution agreements suggesting that jetstream was sugarloaf ’s only other partner sugarloaf ’s and tax returns identify jet- stream cbd and globex as partners but exclude arapua and include warwick and mr rogers testified that there are at least three other equity partners in sugarloaf whose cap- ital interests do not appear on sugarloaf ’s tax returns there is not a scrap of documentation of these supposed capital interests outside of quickbooks balance sheets corroborated only by mr rogers’ self-serving testimony kenna trading llc v commissioner parties genuinely embarking on a joint business endeavor with the intent of sharing in its profits and losses would not accept such ambiguity regarding their respective proportions and with whom they would be sharing those profits and losses these issues in sugarloaf ’s formation are alone enough for us to conclude that as a factual matter-and as was true in superior trading-the parties never intended to join together in the conduct of a business but we need not and do not stop there b poorly disguised sales like the transactions with the partnerships the trans- actions with the brazilian retailers in these cases suffer the same infirmity as the transactions in superior trading namely mr rogers has once again failed to adequately and convincingly rebut persuasive evidence of redemptions both globex and cbd received cash distributions in redemp- tion of their interests within two years of their alleged con- tributions of property to sugarloaf generally contributions of property by partners to a part- nership do not trigger gain_or_loss recognition sec_721 but in some situations the direct or indirect transfer of money or other_property to a partner that is related to a direct or indirect transfer of money to the partnership can be recharacterized as a sale_or_exchange of property sec_707 the basic test to determine whether the trans- fers constitute a sale of property is whether considering all the facts and circumstances i t he transfer of money or other consideration would not have been made but for the transfer of property and ii i n cases in which the transfers are not made simultaneously the subsequent transfer is not dependent on the entrepreneurial risks of partnership oper- ations sec_1_707-3 income_tax regs the regulations instruct us to consider a number of facts and circumstances in determining whether the transaction constitutes a sale id subpara there is also a significant question whether the purported trans- actions ever occurred given the apparent failure to properly identify the re- ceivables being transferred to notify the makers and to otherwise comply with brazilian law united_states tax_court reports the regulations governing disguised sales also contain a two-year presumption id para c distributions within two years of a contribution give rise to a presumption that the transaction is a disguised sale id distributions more than two years after the contribution give rise to a presumption that the transaction is not a disguised sale id petitioners here bear the burden of rebutting the former presumption see superior trading llc v commissioner f 3d pincite with respect to globex as mr hartigan signed up inves- tors and received the purchase_price he forwarded some of the money to multicred multicred used a portion of this money to redeem globex these initial payments took place in and thus trigger the two-year presumption in favor of a sale petitioners did nothing to rebut this presump- tion and it is only strengthened by the undated letter in which globex requests a redemption furthermore mr rogers sent additional money to the account of globalstores which we believe to be related to globex in the evidence surrounding these pay- ments shows that mr rogers believed that he had already paid globex it is possible that these payments were for the purchase of additional receivables either way peti- tioners introduced no evidence sufficient to rebut the dis- guised-sale presumption raised by mr hartigan’s payments to globex via multicred in therefore sugarloaf to the extent it was a partnership had only a cost_basis in the globex receivables because of the opaque manner of the redemption sugarloaf lacks clear records of what it paid for mr rogers and mr hartigan spent a significant portion of the trial disputing who paid what when and why mr rogers evidently believes or at least would have us believe that mr hartigan embezzled the money paid_by the investors and due to sugarloaf mr hartigan says that pursu- ant to mr rogers’ instructions he sent the money to multicred respond- ent to the extent he wanted to get embroiled in this dispute states these disagreements amount to finger-pointing possibly stemming from mr hartigan’s fees ultimately the evidence shows that mr rogers in- structed mr hartigan to send portions of the payments mr hartigan col- lected from investors and owed to sugarloaf to multicred as constructive distributions from sugarloaf to us the intent to distribute the cash in is sufficient to invoke the disguised-sale rule at the very least it is near-conclusive proof that the transfer of the receivables would not have been made but for the promise of near-contemporaneous cash payments kenna trading llc v commissioner the receivables and so has not established that its basis was greater than zero with respect to cbd we also find that the two-year presumption in favor of a disguised sale applies while the transactions here were slightly more complex the weight of the evidence reflects an indirect transfer of money to cbd in exchange for a direct transfer of assets the purported transfer of assets took place as early as the date of the con- tribution agreement date cbd received money for its partnership_interest by the end of date as with the globex receivables petitioners have not presented evidence sufficient to overcome the presumption under the disguised-sale regulations that the transaction should be treated as a sale therefore in sugarloaf ’s hands the cbd receivables like the globex receivables had only a cost_basis c retracing our steps once again echoing superior trading we also believe that the transactions at issue here should be collapsed to reflect their true economic_substance a sale of receivables from the retailers to sugarloaf the true substance of a transaction rather than its nominal form governs its federal tax treat- ment superior trading llc v commissioner t c pincite see also 324_us_331 one tool that this court like others uses to drill down to the substance of a transaction is the step_transaction_doctrine see 85_tc_309 f ormally separate steps in an integrated and interdependent series that is focused on a particular end result will not be afforded independent significance in situa- tions in which an isolated examination of the steps will not lead to a determination reflecting the actual overall result of the series of steps in deciding whether to invoke this doc- trine courts generally look to one of three alternative tests the binding_commitment_test the end result test or the interdependence test superior trading llc v commis- sioner t c pincite the binding_commitment_test is the most restrictive and asks whether there was a binding commitment at the time of the first step to take the subsequent steps 391_us_83 this test is seldom used and is applicable only where a substantial period of time ha sec_143 united_states tax_court reports passed between the steps that are subject_to scrutiny andantech llc v commissioner tcmemo_2002_97 slip op pincite aff ’d in part remanded in part 331_f3d_972 d c cir see also 688_f2d_520 7th cir stating that the test was formulated to deal with the characterization of a transaction that in fact spanned several tax years rev’g 76_tc_972 the transactions in question took place within two months at the shortest and if we look only at mr rogers’ payment to globex and disregard the contem- poraneous payments by mr hartigan two years at the longest this is not a situation where the transactions spanned several years and it is unclear whether the binding_commitment_test should apply see superior trading llc v commissioner t c pincite citing 927_f2d_1517 n 10th cir for the same proposition the end result test looks to the subjective intent of the parties and asks whether the formally separate steps are prearranged components of a composite transaction intended from the outset to arrive at a specific end result id see also mcdonald’s rests of ill inc v commissioner f 2d pincite in these cases mr rogers intended from the outset to import the foreign losses into the united_states to obtain tax benefits he could not have done so without the alleged part- nership contributions and subsequent distributions-other- wise he would lose the tax basis and would be unable to allo- cate the built-in losses to the investors while no one from globex or cbd testified as to the intent of the brazilian retailers our disguised-sale analysis above supports the conclusion that they intended from day one to obtain cash for their assets independent of any entrepre- neurial risk of a debt collection business in fact the parties underwent transactional contortions to avoid the appearance of a redemption in the case of cbd the parties used a series of middlemen and loan documents in the case of globex mr rogers and mr hartigan sent the money to globex through multicred in both cases the end result is the same the bra- zilian retailers received cash and sugarloaf acquired receiv- ables with in its view built-in tax losses the end result test allows and encourages us to collapse the contribution of kenna trading llc v commissioner receivables to sugarloaf and its subsequent distributions of money and to treat the transactions as sales the same holds true when we apply the interdependence test which asks whether ‘the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series ’ 88_tc_1415 quoting 630_f2d_1169 7th cir rev’g on other grounds 71_tc_597 the steps in the transactions among sugarloaf the retailers and the intermediaries who funneled cash to the retailers wholly lack valid and independent economic or business purposes which represents the heart of the inquiry under the interdepend- ence test superior trading llc v commissioner t c pincite petitioners cannot explain the redemption of the bra- zilian retailers except to claim any payments were participa- tion payments due to sugarloaf ’s securitization of the receiv- ables this feeble explanation-much like mr rogers’ claims that when he used the word redeemed in contemporaneous documents he was using the term loosely and that he used the term purchase as a term of art-do not persuade us that the cash payments to the retailers served any purpose other than redeeming their purported partnership interests we find no economic or business_purpose for the brazilian retailers’ entry into and exit from sugarloaf these trans- actions’ only purpose was to facilitate the always-intended writeoff of the receivables’ built-in losses and their allocation to the united_states tax_shelter investors thus we collapse the steps undertaken by mr rogers the retailers and the intermediaries the proper characterization of the stepped transaction is as a sale of the receivables from the retailers to sugarloaf hence sugarloaf ’s basis in the receivables would be a cost_basis with respect to cbd the evidence shows that the money sent to cbd through middlemen was dollar_figure thus sugarloaf took a basis in the cbd receivables of dollar_figure as discussed infra pp this finding does not allow the trading company petitioners a sec_166 deduction because they failed to prove that they meet the requirements of sec_166 the evidence with respect to globex is less clear globex clearly received money from both mr hartigan via multicred in and again from mr rogers in but united_states tax_court reports petitioners were unable to substantiate these payments in any meaningful manner evidence suggests that mr rogers sent globex dollar_figure in but its not clear whether this payment was solely duplicative of payments by mr hartigan or whether a portion of it was for a new batch of receivables either way it is not enough for us to accurately determine sugarloaf ’s cost_basis consequently petitioners having failed to carry their burden of establishing basis sugarloaf had a zero basis in the globex receivables d sham on you a general principle of federal income_taxation is that while a taxpayer has a right to conduct transactions in a manner that minimizes or outright avoids federal_income_tax 293_us_465 the tax- payer does not have a right to use forms or structures lacking economic_substance to avoid taxation 79_tc_714 aff ’d 731_f2d_1417 9th cir in such a case s ubstance prevails over form superior trading llc v commissioner f 3d pincite this doctrine is as applicable in the trust context 992_f2d_789 8th cir aff ’g tcmemo_1991_508 as it is in the partnership context superior trading llc v commissioner f 3d pincite the court_of_appeals for the seventh circuit addressing a transaction almost identical to the partnership trans- actions in these cases said there is not even a colorable basis for the tax_shelter that mr rogers created and the parties implemented id pincite affirming this court’s decision for the commissioner the court_of_appeals held that the sugarloaf-type entity in that case was a sham_partnership and entitled to none of the benefits that the internal_revenue_code bestows on partnerships id pincite the court_of_appeals concluded that n o joint business goal motivated the creation of warwick the sugarloaf-type entity and that a redemption by warwick of the brazilian retailer created the presumption of a sale which the tax- payers did not rebut id pincite the only differences in these cases are that two different brazilian retailers were used and the redemption of these retailers occurred in a slightly different manner but for all practical purposes the transactions are the same consequently under the court of kenna trading llc v commissioner appeals for the seventh circuit’s logic and ours sugarloaf must also be a sham_partnership not entitled to the benefits of the federal_income_tax laws e statutory noncompliance the loss deductions ultimately claimed by the partnerships and by mr and mrs rogers rested on the claim that the receivables were bad_debts sec_166 provides sec_166 general_rule - wholly worthless debts -there shall be allowed as a deduc- tion any debt which becomes worthless within the taxable_year partially worthless debts -when satisfied that a debt is recoverable only in part the secretary may allow such debt in an amount not in excess of the part charged off within the taxable_year as a deduction the amount of the deduction is limited to the taxpayer’s adjusted_basis sec_166 the code does not permit noncor- porate taxpayers to take ordinary_income deductions under sec_166 for wholly or partially worthless nonbusiness_debt requiring that they instead treat such worthlessness as a capital_loss sec_166 nonbusiness_debt is debt other than- a a debt created or acquired as the case may be in connection with a trade_or_business of the taxpayer or b a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade_or_business sec_166 the tax- payer must establish the amount of the debt that is worth- less sec_1_166-3 income_tax regs respondent distills the above requirements into four ele- ments a charge-off for a partially worthless_debt proof of a trade_or_business proof of worthlessness and proof of basis in the debt we agree with this character- ization and also agree with respondent that petitioners have not carried their burden_of_proof with respect to any of these elements first the partnerships and the trusts as far as we can tell did not keep reliable if any financial books_or_records particularly as to the specific receivables purchased and which ones should be charged off instead a blanket of all receivables was used for charge-off purposes thus peti- tioners failed to properly show that they charged off the por- tion of the debt claimed as a deduction united_states tax_court reports second petitioners failed to show that they acquired the receivables in connection with a trade_or_business the trading companies and the trusts did not operate as trades_or_businesses they merely operated as conduits for losses imported into the u s tax system with one exception there is no evidence that any of the investors entered into these relationships with the expectation of economic profit inde- pendent of the tax results in addition in the case of the globex receivables it is likely that the collection efforts the only purported business activity with which sugarloaf and the other partnerships were connected did not even begin until a considerable time after the receivables were acquired third petitioners failed to prove worthlessness evidence in the record reflects that petitioners and multicred could not conduct an analysis of the individual debts and petitioners provided no statistical study or other analysis of which debts or types of debts were worthless the fact that every trading company and trust claimed a deduction of across the board undercuts any claim that the companies truly analyzed the assets’ value fourth petitioners failed to prove they ever had bases in the receivables equal to the deductions claimed for the rea- sons discussed above petitioners had at most cost bases in summary petitioners have not carried their burden of proving their entitlement to the claimed sec_166 deduc- tions respondent correctly disallowed these deductions in full ii superior trading with a twist of trust the substantive analysis above applies equally to the and tax_year transactions in particular the trans- the one exception is christopher heath brown an investor who ques- tioned mr rogers as to when he would see results mr rogers essentially rebuffed dr brown saying that he should be happy with the tax losses and dr brown did not complain again petitioners’ only argument on the worthlessness issue presented in their answering brief is built-in_loss was chosen as that was the rate of bad_debt_reserve provided by arapua against the balance_sheet gross historic cost of the receivables a partial worthlessness percentage against cbd and globex receivables could have been less or more than the used in the case of arapua far from carrying petitioners’ burden_of_proof this argument amounts to additional evidence that the worthlessness claim was an arbitrary number kenna trading llc v commissioner actions involving sterling ridge that underlay the rogerses’ claimed sec_166 deduction for the brazilian retailers’ contributions to sugarloaf failed to preserve the retailers’ built-in losses in the receivables because no valid partnership was formed or alternatively because the con- tributions were in fact disguised sales accordingly there was no or next to no sec_166 deduction for the subtrusts formed in to claim yet even leaving aside the fundamental flaws in the transfer of assets at the sugarloaf level which necessarily limit built-in losses in the assets of the trusts the step trans- action doctrine discussed supra pp applies to col- lapse the steps in the trust transactions into sales of receiv- ables from sugarloaf to the main trusts the steps of the transactions can be summarized as follows mr rogers formed a main trust in the name of an investor he then caused sugarloaf to contribute receiv- ables to the main trust formed a subtrust under that main trust and assigned the receivables to the subtrust the investor contributed cash and or promissory notes to the main trust’s bank account which was controlled by mr rogers and received in exchange a beneficial_interest in the receivables in the subtrust the investor by the terms of the various documents was entitled to take direct ownership of those receivables sugarloaf over the course of months drained the main trust bank account under the guise of maintenance payments or other_payments applying the end result test the overall objective of these transactions was for mr rogers to sell and for the investors to purchase tax losses achieving this objective entailed transferring the receivables to the investor in a manner that would preserve the receivables’ tax bases in the hands of the brazilian retailers while obtaining cash from the investors because of the ajca the partnership structure was no longer viable so mr rogers employed a_trust structure instead the parties clearly intended that the transaction generate tax losses well in excess of the investors’ economic outlays applying the interdependence test no independent business or economic purpose existed for the convoluted trust structure the creation of the main and subtrusts would be fruitless without the eventual flowthrough of the sec_166 deductions thus we have no qualms about collapsing the united_states tax_court reports steps of the trust transactions sterling ridge’s investment in the trust transaction was no more than a purchase of receivables from sugarloaf thus sterling ridge was entitled to only a cost_basis our foregoing conclusions regarding the collapse of the trust transactions into sales of receivables and the basis problems at the sugarloaf level would each alone suffice to disallow the rogerses’ claimed sec_166 deduction for but the trust structure fails at a more funda- mental level and lest mr rogers’ faulty template persist as a trap for the unwary we proceed to explain why the trust transactions were close cousins of the partnership transactions because built-in losses could no longer be shifted within a partnership while the code con- tained no analogous limitation for trusts mr rogers hoped that the receivables would have a carryover_basis upon con- tribution to a_trust without the relationship between the investor and sugarloaf turning into a partnership see sec_1015 after those receivables had been allocated to a subtrust and an investor designated as its beneficiary the investor would be the subtrust’s beneficiary and grantor by virtue of the investor’s cash contribution to the main trust because the terms of the various trust documents entitled the investor to take direct ownership of the subtrust assets mr rogers reasoned that the subtrust would be a grantor_trust in a grantor_trust the person treated as the grantor includes in his or her federal taxable_income as computed on the tax_return the trust’s items of income deduction and credits against tax see sec_671 hence the investor could partake in the receivables’ built-in losses mr rogers also hoped that the main and subtrusts would qualify as trusts under the check-the-box_regulations see sec_301_7701-4 proced admin regs but federal_law determines how an entity organized under state law is taxed 319_us_436 whether an arrangement is a_trust generally depends on whether the purpose of the arrangement is to vest in trustees responsibility for the protection and con- servation of property for beneficiaries who cannot share in the discharge of this responsibility and therefore are not associates in a joint enterprise for the conduct of business for profit sec_301_7701-4 proced admin regs see also kenna trading llc v commissioner 296_us_344 discussing the difference between an ordinary_trust and a business_trust the business_trust label will not change the real character of the organization if the organiza- tion is more properly classified as a business_entity under sec_301_7701-2 sec_301_7701-4 proced admin regs as a purely factual matter the purpose of the trust arrangements was not to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility see sec_301_7701-4 proced admin regs the purpose of the main trust and the subtrust was merely to transfer_tax losses from one party to another party the parties did not intend to protect and conserve the receivables as the absence of assignment and collection documentation demonstrates that the trusts wrote off most of the receivables within weeks or months of their formation reveals for the fiction that it is the proposition that the trustee here protected and conserved the trusts’ assets therefore neither the main trusts nor the subtrusts appear to be trusts for federal_income_tax purposes nor can we properly classify them as business trusts given that they did not operate to provide a medium for the conduct of a business and sharing its gains see morrissey v commissioner u s pincite because these entities were not trusts for the purposes of federal_income_tax law we are left to determine what hap- mr rogers calls his trusts illinois business trusts such entities under state law are not partnerships schumann-heink v folsom n e ill discussing a massachusetts business_trust a business_trust can be a_trust ‘where the owners of a business or of shares in a business corporation transfer the property of the business or all or a large part of the stock to trustees for themselves ’ hanley v kusper n e 2d ill quoting g bogert the law of trusts and trustees sec_270 pincite 2d ed sec_301_7701-4 proced admin regs merely restates the general principle that labels used by taxpayers are not conclusive see 435_us_561 see also 47_tc_680 ‘mere forms of instruments of course and the use of words ‘trust’ and ‘trustee’ cannot be depended upon in determining whether or not a_trust is in reality created the transaction itself must be scrutinized ’ quoting 90_f2d_18 8th cir aff ’g 33_bta_800 we look beyond mr rogers’ labels united_states tax_court reports pened usually such an entity with two or more members would by default be considered a partnership sec_301_7701-2 proced admin regs but there was no more intent for the investor and sugarloaf to join together to con- duct a debt-collection business than there was for sugarloaf and the brazilian retailers to join together in such a busi- ness see commissioner v culbertson u s pincite supra pp therefore we are left in a situation analogous to that with the brazilian retailers and sugarloaf the investor exchanged cash for receivables which were intended to generate tax losses we note that even if we were to find that the trust investor and sugarloaf entered into a partner- ship the ajca would prevent the shifting of losses away from a contributing_partner and the disguised sales rules of sec_707 would also come into play under both the step_transaction_doctrine and the rules governing trusts neither the sterling ridge trust nor its subtrust was a_trust for federal_income_tax purposes rather sterling ridge as a stand-alone entity purchased the receivables from sugarloaf finally as we concluded with sugarloaf we find that the sterling ridge trust and subtrust lacked economic_substance and were shams sterling ridge trust and subtrust were not trusts for the purposes of federal_income_tax law the par- ties did not intend for the trustee to preserve and conserve the assets for the beneficiaries consequently mr and mrs rogers were entitled to none of the federal_income_tax bene- fits of the trust structure see superior trading llc v commissioner f 3d pincite ‘an entity without economic_substance whether a sham_partnership or a sham trust is a sham either way and hence is not recognized for federal tax law purposes ’ quoting 509_f3d_1149 n 9th cir aff ’g t c memo for the foregoing reasons we conclude that respondent properly disallowed the rogerses’ claimed sec_166 deduc- tion for iii the devil’s in the details respondent determined that sugarloaf greatly overstated its cost_of_goods_sold on its partnership return by taking the kenna trading llc v commissioner position that its cost_of_goods_sold was equal to its claimed carryover_basis in the contributed receivables we agree for the reasons stated above sugarloaf failed to prove that it had a basis in the globex receivables and failed to prove it had a basis greater than dollar_figure in the cbd receivables at most therefore sugarloaf proved a basis of dollar_figure in the partnership interests it sold sugarloaf is entitled to a cost_of_goods_sold of only dollar_figure with respect to the deductions respondent disallowed sugarloaf is not entitled to them deductions are a matter of legislative grace and taxpayers bear the burden of proving that they are entitled to any deduction rule a 503_us_79 taxpayers must identify each deduction show they meet all requirements and substantiate all items underlying claimed deductions sec_6001 62_tc_834 sec_162 allows a deduction for all ordinary and necessary business_expenses paid_or_incurred in connection with a trade_or_business but expenditures made in an attempt to obtain abusive_tax_shelter benefits are not ordinary and necessary business_expenses or otherwise deductible under sec_162 139_tc_67 the transactions in question were tax_shelters and sugarloaf ’s claimed expendi- tures were made in an attempt to obtain abusive_tax_shelter benefits we note that while economic_substance is a prerequisite to the appli- cation of any code provision allowing deductions 939_f2d_44 3d cir aff ’g tcmemo_1988_570 cost_of_goods_sold is not a deduction see azimzadeh v commissioner tcmemo_2013_169 at citing 88_tc_654 furthermore jetstream through mr rogers failed to substantiate items underlying sugarloaf ’s deductions the record includes only a quickbooks transaction record for most expenses and canceled checks drawn on sugarloaf ’s bank account to mr gabel and to seyfarth shaw sugarloaf ’s records are generally unreliable and we do not accept the quickbooks records as sufficient substantiation while mr gabel testified that he provided services to sugarloaf during the years at issue we have no invoices or other proof including testimony of the extent of his serv- ices mr rogers failed to provide evidence as to the nature and extent of the services provided by seyfarth shaw because of the confusing flows of money among the investors seyfarth shaw sugarloaf and various other continued united_states tax_court reports respondent also determined that sugarloaf understated its gross_income based upon a bank_deposits analysis petitioner jetstream disputes certain deposits for both and and accordingly bears the burden of proving that respond- ent’s inclusion of these deposits in sugarloaf ’s income is incorrect see 96_tc_858 aff ’d 959_f2d_16 2d cir with respect to the two disputed deposits in mr rogers claims that both were equity contributions to sugarloaf unfortunately mr rogers provides no evidence other than his self-serving testimony and a balance_sheet mr rogers disavows the accuracy of the balance_sheet with respect to some entries but expects us to accept it as accurate with respect to others we decline to do so in addition his testimony conflicts with the tax returns filed by sugarloaf he did not provide contribution agreements or other indicia of an equity_investment by the depositing individuals thus we cannot conclude that these payments were equity contributions mr rogers did not provide any other explanation for these deposits and he did not carry jetstream’s burden_of_proof that these deposits were other than income to sugarloaf with respect to the disputed deposits mr rogers claims these deposits are either capital contributions equity deposits or amounts transferred to sugarloaf that should have been deposited directly into trust accounts trust deposits as with the deposits we reject mr rogers’ position he introduced no evidence other than self-serving testimony and quickbooks records that the equity deposits were in fact equity contributions as to the july november and date deposits sugarloaf ’s quickbooks entries indicate these deposits were from ppi funds or in the case of the november deposit sterling ridge but there is no corroborating evidence that these entities and in light of the lack of a factual basis on which to make esti- mates we decline to estimate the extent of services and hence we bear heavily on sugarloaf ’s inexactitude see 245_f2d_559 5th cir 39_f2d_540 2d cir 85_tc_731 on brief mr rogers contends that the amounts shown as equity inter- ests for multicred and sugarloaf overseas are loans not equity invest- ments kenna trading llc v commissioner deposits actually came from ppi and frankly we do not find mr rogers’ testimony or the quickbooks entries credible with respect to the alleged sterling ridge deposit we have no way of knowing whether the deposit came from sterling ridge inc or the sterling ridge trust if it even came from either of these sources with respect to the alleged multicred equity deposit we have rejected petitioner’s contention that multicred was a partner in sugarloaf and likewise reject its contention that this deposit was an equity contribution the quickbooks entries alone are insufficient to prove these deposits were equity investments cf 139_tc_19 holding that general ledgers by themselves are insufficient to substantiate items underlying a taxpayer’s claimed deductions ohana v commissioner tcmemo_2014_83 at finding quickbooks records of expenses a summary of taxpayer’s assertions which when uncorroborated are not enough to substantiate items under- lying the taxpayer’s claimed deductions the while the names of the transferors are consistent with those of trust investors mr rogers has nonetheless failed to convince us that the trust deposits are anything but income to sugarloaf first we have no evidence that these amounts were ever transferred to the trust bank accounts second and conclusively here we found that in these trans- actions the investors each purchased a tranche of receivables from sugarloaf making the money paid into the trust accounts income to sugarloaf under sec_1001 so regard- less of whether the investors’ payments went into the trust accounts or directly to sugarloaf those amounts were still income to sugarloaf we note that respondent has determined only that the six trust depos- its actually deposited into sugarloaf ’s bank account constitute income under our findings all payments by the trust investors would constitute income to sugarloaf less fees retained by the promoters we will not ques- tion respondent’s magnanimity united_states tax_court reports iv in the penalty box liable a sec_6662 respondent determined penalties against all of the part- nerships in these consolidated cases-that is for sugarloaf and for each of the trading companies he determined that the partnerships were for the gross_valuation_misstatement penalty under sec_6662 on portions of their underpayments attributable to misstatements of their respective bases in the receivables respondent also deter- mined that sugarloaf is liable for the accuracy-related pen- alty for negligence or in the alternative substantial under- statements of income_tax on portions of its underpayments attributable to its additional income and the disallowed deductions he bears the burden of production with respect to these accuracy-related_penalties but petitioners bear the burden_of_proof if respondent meets his burden of production see 116_tc_438 sec_6662 and b provides for a penalty to be imposed on the portion of an underpayment_of_tax required to be shown on a return that is attributable to a substantial_valuation_misstatement as relevant here for returns filed after date a substantial_valuation_misstatement occurs when the value of any property or the adjusted_basis of any property claimed on any return of tax_imposed_by_chapter_1 i sec_150 percent or more of the amount determined to be the correct amount of such valuation or adjusted_basis as the case may be sec_6662 for returns filed on or before date the percentage was instead of pension_protection_act of pub_l_no sec a a e stat pincite sec_6662 increases this penalty to if the value or adjusted_basis claimed on the return is or more of the actual value or adjusted_basis for returns filed on or before date the penalty applies if the value or adjusted_basis is or more of the actual basis or value id sec a a a regulation clarifies that when the actual value or basis is zero that value is considered or more we do not here redetermine the penalties determined against mr and mrs rogers and mr fears with respect to their form sec_1040 u s indi- vidual income_tax return see supra note kenna trading llc v commissioner of the correct amount sec_1_6662-5 income_tax regs petitioners do not challenge application of this regulation see united_states v woods u s ll ll 134_sct_557 n noting the inherent mathematical problem of dividing a number by zero in these cases respondent has met his burden of produc- tion the globex receivables had a zero basis and the part- nerships with those receivables grossly overstated their bases in those receivables for the cbd receivables which had a total combined basis of dollar_figure the partnerships including two not at issue here reported a total adjusted_basis of dollar_figure assuming that each partnership received a tranche of receivables with a basis equal to its pro_rata share of the dollar_figure aggregate basis each partnership overstated its basis by far more than furthermore sugarloaf ’s aggregate claimed adjusted_basis in the partnership interests it sold was far more than of the actual adjusted_basis which we found to be in total dollar_figure an accuracy-related_penalty will not be imposed with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith sec_6664 when deter- mining whether a partnership had reasonable_cause and acted in good_faith we look to the general_partner superior trading llc v commissioner t c pincite during the years at issue jetstream was the managing member of sugarloaf and each of the trading companies we do not believe mr rogers when he claims that mr mazzucchelli was the manager of sugarloaf we think that claim along with the engagement letter between sugarloaf and seyfarth shaw a poorly veiled attempt to get around the conflict of interest inherent in having mr rogers’ law firm represent a limited_liability_company controlled through its tax_matters_partner jetstream by mr rogers mr rogers through jet- stream was the only individual with the authority to act on behalf of sugarloaf and the trading companies and it is his conduct that is relevant for determining whether we should sustain the determined accuracy-related_penalties as was the case in superior trading mr rogers’ knowl- edge and experience should have put him on notice that the tax benefits sought by the form of the transactions would not be forthcoming and that these transactions would be re- united_states tax_court reports the advice of characterized and stepped together to reveal their true sub- stance id pincite we reject his contention that he reason- ably relied on tax professionals see 115_tc_43 establishing a three-factor test for determining whether reliance on tax professionals may be reasonable_cause aff ’d 299_f3d_221 3d cir mr rogers’ asser- tions on brief that he relied upon outside professionals lack even a smidgen of evidentiary foundation other than his own testimony petitioners have not borne their burden_of_proof under sec_6664 with respect to any of the partnerships and we therefore hold that the sec_6662 and h penalty applies to be clear this penalty applies against the trading companies for overstating their bases in the receivables as well as to sugarloaf in sugarloaf ’s case it not only over- stated its basis in the receivables but also overstated its basis in the trading companies that it subsequently sold resulting in a grossly overstated cost_of_goods_sold further we find that an accuracy-related_penalty of applies to the portions of the undepayments attributable to sugarloaf ’s omissions from gross_income and disallowed deductions a sec_6662 penalty applies to portions of an underpayment_of_tax due to negligence or disregard of rules and regulations or to a substantial_understatement_of_income_tax if the amount of the understatement exceeds the greater of dollar_figure dollar_figure in the case of a corporation or of the tax required to be shown on the return sec_6662 and we conclude that respondent has met his burden of production with respect to the penalty for negligence or dis- regard of rules and regulations petitioners failed to substan- tiate the items underlying their deductions and provide a reasoned and convincing explanation for the deposits their recordkeeping appears to have been scanty to nonexistent and noncontemporaneous beyond a quickbooks log which we did not find credible and will not rely on the cashflows to and from sugarloaf are confusing and mr rogers’ failure to keep records of the alleged contributions to capital and to explain contemporaneous document equity ownership totaling up to is negligent at best furthermore for the same reasons discussed above mr rogers has fallen well kenna trading llc v commissioner short of his burden of proving reasonable_cause and good_faith b sec_6662a respondent also seeks to impose a sec_6662a penalty on sugarloaf for its and tax years sec_6662a imposes a penalty on understatements due to reportable_transactions or listed transactions sec_6662a b this penalty increases to if the taxpayer does not adequately disclose the transaction sec_6662a for the same reasons discussed below with respect to the tax_year we find that respondent has satisfied his bur- den of production as to this penalty for however the sec_6662a penalty does not apply with respect to the por- tion of an understatement on which a gross_valuation_misstatement penalty is imposed sec_6662a we have imposed the gross_valuation_misstatement penalty on the portions of the understatement of sugarloaf that would be subject_to the sec_6662a penalty so that pen- alty does not apply to any amount for sugarloaf ’s tax_year as for sugarloaf ’s tax_year respondent wants us to apply the sec_6662a penalty to any understatement attributable to adjustments to sugarloaf ’s tax characteriza- tion of the dat distressed asset trust transaction in respondent contends that the dat transaction is a listed_transaction and sugarloaf did not disclose it sec_6662a refers us to sec_6707a for the definition of a listed_transaction the code defines a listed_transaction as a tax_avoidance transaction identified by the internal_revenue_service irs and points us to the regula- tions under sec_6011 sec_6707a the regulations define a listed_transaction as the same as or substantially_similar to any transaction identified by the irs as such in a notice regulation or other form of published guidance sec_1_6011-4 income_tax regs a substantially_similar transaction is either factually similar or based on the same or similar tax strategy sec_1_6011-4 income_tax regs in these cases no one disputes that the trust transactions are substantially_similar to the transaction identified in united_states tax_court reports notice_2008_34 2008_1_cb_645 generally the irs requires a taxpayer to disclose listed transactions on a state- ment attached to the taxpayer’s return sec_1_6011-4 income_tax regs in these cases the irs issued the notice on date well after sugarloaf filed its tax_return on date the regulations in effect for the tax years at issue covered just such a situation requiring the taxpayer to file a disclosure statement as an attachment to the taxpayer’s tax_return next filed after the date the trans- action is listed sec_1_6011-4 income_tax regs nei- ther sugarloaf nor its tax_matters_partner filed such a disclo- sure statement sec_6664 provides a reasonable_cause and good_faith defense to the sec_6662a penalty but only if the transaction is disclosed thus the pen- alty applies to the portion of sugarloaf ’s understate- ment that stems from the trust transactions to the extent the understatement is not already subject_to the sec_6662 gross_valuation_misstatement penalty see sec_6662a v conclusion contrary to mr rogers’ contentions throughout these cases the partnership structures did not materially mr rogers on sugarloaf ’s behalf contends that notice_2008_34 2008_1_cb_645 is invalid as a violation of executive_order c f_r he believes that notice_2008_34 supra is a significant regulatory action and that under executive_order the office of management and budget omb must review proposed significant regu- latory action because omb did not do so mr rogers argues the notice is invalid in so arguing he ignores section of the executive_order which states nothing in this executive_order shall affect any otherwise available judi- cial review of agency action this executive_order is intended only to im- prove the internal management of the federal government and does not create any right or benefit substantive or procedural enforceable at law or equity by a party against the united_states its agencies or instru- mentalities its officers or employees or any other person exec order no c f_r pincite mr rogers cannot challenge notice_2008_34 supra as not in compliance with the executive_order see 133_tc_431 rejecting for the same reason a taxpayer’s challenge to tem- porary regulations under executive_order supplemented by tcmemo_2012_273 kenna trading llc v commissioner differ from the structures at issue in superior trading llc like arapua in superior trading llc the brazilian retailers in these cases were also redeemed out of the parent partnership in that case warwick resulting in a deemed sale of the receivables to sugarloaf and mr rogers provided no convincing evidence that the structure in these cases had any objective independent of the shifting of losses from a tax- indifferent party to a tax-motivated party the trust transactions differed little from the transactions they suffer from the same fatal flaws as the transactions-namely the planned and near-contem- poraneous redemption of the brazilian retailers further the form of the transaction when appropriately stepped together consists of a sale of receivables to the investors we treat it as such in addition the trust transaction was devoid of economic_substance and we will therefore issue an order stating that mr and mrs rogers are not entitled to the sec_166 deduction they claimed on their tax_return this opinion makes abundantly clear that neither the partnership transaction nor the trust transaction works and we have discussed myriad reasons why not these reasons constitute alternative holdings each by itself sufficient to sustain respondent’s adjustments superior trading llc v commissioner tcmemo_2012_110 slip op pincite for sugarloaf moreover jetstream through mr rogers failed to successfully carry its burden_of_proof with respect to any of sugarloaf ’s claimed deductions on its and tax returns mr rogers similarly failed to provide convincing explanations for the challenged gross_receipts in sugarloaf ’s and tax years liable the gross_valuation_misstatement penalty for the tax_year for overstating the bases of its interests in the holding_companies sold to investors the remaining partnerships in these cases are likewise liable for the gross_valuation_misstatement pen- alty for overstating their bases in the receivables sugarloaf is further liable for a accuracy-related_penalty under sec_6662 and b for the portions of the underpay- ments due to the disallowed deductions for the and tax years and the amounts of income omitted from its and tax returns sugarloaf is also liable for a i sec_143 united_states tax_court reports penalty under sec_6662a for the reportable_transaction_understatement attributable to the trust structure the court has considered all of the parties’ contentions arguments requests and statements to the extent not dis- cussed herein the court concludes that they are moot irrele- vant or without merit appropriate orders will be issued at docket nos and decision will be entered under rule in docket no and decisions will be entered for respondent in all other cases appendix kenna trading llc jetstream business limited tax mat- ters partner docket no connemara trading group llc jetstream business limited tax_matters_partner docket no zugersee trading llc jet- stream business limited tax_matters_partner docket no bielersee trading llc jetstream business lim- ited tax_matters_partner docket no ridgeway fund llc jetstream business limited tax_matters_partner docket no grey stone trading llc jet- stream business limited tax_matters_partner docket no turnberry trading llc jetstream business lim- ited tax_matters_partner docket no northgate trading llc jetstream business limited tax_matters_partner docket no thornhill trading llc jet- stream business limited tax_matters_partner docket no saddlebrook trading llc jetstream business limited tax_matters_partner docket no suten fund llc jetstream business limited tax_matters_partner docket no remington trading llc jet- stream business limited tax_matters_partner docket no for instance we find mr rogers’ contention that respondent’s failure to audit the subtrusts’ returns is fatal to be without merit likewise re- spondent’s statement in his answer in docket no that he prepared the answer without benefit of the administrative file does not render the determined deficiency arbitrary and capricious finally we reject mr rog- ers’ claim to a deduction for sugarloaf for income reported by warwick on its tax_return but purportedly never received kenna trading llc v commissioner r b taylor trading llc jetstream business lim- ited tax_matters_partner docket no riversedge fund llc jetstream business limited tax_matters_partner docket no murtensee trading llc arrowhead fund llc tax_matters_partner docket no monte rosa fund llc jetstream business lim- ited tax_matters_partner docket no ofenpass fund llc jetstream business limited tax_matters_partner docket no knight trading llc jet- stream business limited tax_matters_partner docket no essex fund llc jetstream business limited tax_matters_partner docket no lyman trading llc jetstream business limited tax_matters_partner docket no dent-blanche fund llc jetstream business limited tax_matters_partner docket no harlan fund llc jetstream business limited tax_matters_partner docket no grand-combin fund llc jet- stream business limited tax_matters_partner docket no larkspur trading llc jetstream business lim- ited tax_matters_partner docket no lakeview trading llc jetstream business limited tax_matters_partner docket no davis fund llc jetstream business limited tax_matters_partner docket no cumnor trading llc jetstream business limited tax_matters_partner docket no bodensee fund llc jetstream business limited tax_matters_partner docket no ironwood trading llc windmere fund llc tax_matters_partner docket no zurichsee trading llc jetstream business limited tax_matters_partner docket no zugersee trading llc jet- stream business limited tax_matters_partner docket no warner fund llc jetstream business limited tax_matters_partner docket no riversedge fund llc jetstream business limited tax_matters_partner docket no gary r fears docket no john e rogers frances l rogers docket no sugarloaf fund llc jetstream business limited tax mat- ters partner docket no f