t c memo united_states tax_court gregory raifman and susan raifman petitioners v commissioner of internal revenue respondent docket no filed date brian g isaacson for petitioners aimee r lobo-berg and catherine j caballero for respondent memorandum findings_of_fact and opinion nega judge by notice_of_deficiency dated date respondent determined deficiencies in the federal_income_tax of petitioners gregory and susan raifman for taxable years and years at issue and accuracy-related_penalties under sec_6662 as follows year deficiency dollar_figure big_number big_number big_number penalty sec_6662 dollar_figure big_number big_number big_number the raifmans timely petitioned this court for redetermination 1unless otherwise indicated all section references are to the internal_revenue_code code in effect for the years at issue all rule references are to the tax_court rules_of_practice and procedure all monetary amounts are rounded to the nearest dollar 2the raifmans have a related case before this court raifman v commissioner docket no 12144-11l cdp case the cdp case results from respondent’s attempt to collect the raifmans’ unpaid tax for there the raifmans claimed entitlement to theft_loss deductions for that if sustained they intend to carry back to to eliminate their unpaid tax balance see eg sec_172 b e d on date respondent filed a motion for summary_judgment motion in that case arguing as relevant here that the raifmans’ sale of stock did not result in a deductible theft_loss on date this court released raifman v commissioner tcmemo_2012_228 wherein we declined to grant respondent’s motion and held that disputed issues of material fact necessitated trial on date the parties filed a joint stipulation to be bound with respect to the cdp case in the stipulation to be bound the parties agreed that the outcome of the present case will resolve all issues presented in the cdp case continued after concessions and stipulations the issues remaining for decision are continued accordingly on date upon due consideration of the parties’ stipulations we ordered that the cdp case be held in abeyance pending the entry of decision in the present case 3the raifmans have stipulated or did not address--at trial or on brief--a number of adjustments determined in the notice_of_deficiency accordingly the raifmans have or are deemed to have conceded the following issues and adjustments see rule b 121_tc_308 87_tc_56 for a dollar_figure increase in capital_gains a dollar_figure reduction in a deduction for mortgage interest claimed on schedule a itemized_deductions a dollar_figure reduction in a claimed deduction for investment_interest claimed on schedule a and the denial of a deduction of dollar_figure claimed on schedule f profit or loss from farming for a dollar_figure reduction in a claimed mortgage interest_deduction and a dollar_figure reduction in a claimed investment_interest deduction for a dollar_figure reduction in a claimed investment_interest deduction and a dollar_figure increase to income to reflect the unreported receipt of a state tax_refund for various computational adjustments the raifmans however did not concede their dispute with respect to the statutory interest determined in the notice_of_deficiency we observe that this court’s jurisdiction to redetermine a tax_deficiency does not permit the court to review or abate statutory interest absent the taxpayer first exhausting his or her otherwise available administrative remedies sec_6404 rule 110_tc_20 cf bennett v commissioner tcmemo_2017_243 at the raifmans neither alleged receipt of nor entered into evi- dence any final_determination wherein respondent rejects their request for abate- ment of interest similarly the raifmans neither alleged nor entered into evidence any proof that they have even filed for or otherwise formally requested from respondent an abatement of interest accordingly we hold that this court lacks jurisdiction to hear the raifmans’ attempt to seek a redetermination of interest under sec_6404 see carter v commissioner tcmemo_2014_142 at whether the raifmans are entitled to deduct theft losses totaling dollar_figure for their tax_year entitled to a long-term_capital_loss deduction of dollar_figure for their tax_year and liable for the sec_6662 accuracy-related_penalty for each of the years at issue 4the notice_of_deficiency disallowed a dollar_figure theft_loss deduction for for the raifmans’ tax_year in their petition the raifmans revised their claimed theft losses to reflect the amount above this amount remaining at issue comprises a dollar_figure loss arising from their participation in the derivium program a dollar_figure loss arising from their participation in the classicstar program a dollar_figure loss arising from their investment in the real return fund and a loss of dollar_figure arising from their investment in the secured lending fund 5the raifmans initially claimed this dollar_figure loss deduction as a component of their dollar_figure theft_loss deduction claimed for tax_year in the notice_of_deficiency respondent disallowed any deduction for the full amount of that theft_loss the raifmans now argue this dollar_figure amount was a properly deductible capital_loss for their tax_year the raifmans’ tax_year however is not before the court additionally we find the record lacks facts sufficient to enable us to consider the implications of the raifmans’ tax_year with respect to our redetermination of the deficiencies properly before this court see 95_tc_437 accordingly our jurisdiction over this loss extends only to reach the claim made on the raifmans’ tax_return we observe that the raifmans have also claimed this loss deduction in a parallel refund_suit brought before the u s court of federal claims with respect to their tax_year on date the u s court of federal claims stayed all proceedings in that case until this court renders a decision in the present matter findings_of_fact some of the facts have been stipulated and are so found the stipulation of facts and the attached exhibits are incorporated herein by this reference the raifmans6 were married and resided in california at all times relevant to this case i the beginning a background mr raifman is a graduate of the university of michigan and the georgetown university law center where he earned a bachelor of arts degree in economics and history and a juris doctorate respectively mr raifman began his professional career as a judicial law clerk serving the u s district_court for the southern district of georgia following his clerkship mr raifman took successive positions at the law firms of latham and watkins and skadden arps meagher and flom at those firms mr raifman gained significant exposure to and practiced in the fields of high-yield debt financing hostile takeovers and corporate mergers and acquisitions mr raifman developed skills in these fields 6the raifmans engaged in the transactions discussed herein both personally and by way of wholly owned pass-through entities notably helicon ltd helicon their entity organized in the cayman islands and the gekko group llc or gekko holdings llc gekko for clarity we distinguish the individual raifmans gekko and helicon only where necessary we otherwise refer to all as the raifmans and in due time he pivoted his legal career to focus his work therein first by taking a position as counsel at montgomery securities where he specialized in facilitating initial and secondary public offerings for his clients and later by founding his own law firm and numerous venture capital_investment and advisory firms primarily dedicated to investing in computing and information technologies and the legal issues arising therefrom it was mr raifman’s work in the capital markets and the technology field that led him to found mediaplex inc mediaplex mr raifman served as president ceo and outside legal counsel of mediaplex and in each role he was compensated by way of stock and options mrs raifman graduated from barnard college where she received a bachelor of arts degree in english she subsequently earned master’s degrees in both business administration and urban planning from the university of california los angeles mrs raifman like her husband experienced success in the corporate world where she was an executive in marketing and promotions for a number of public companies before later taking a similar role at mediaplex in the fourth quarter of mr raifman guided mediaplex’s initial_public_offering mediaplex shares debuted to significant market demand and were at one point valued as high as dollar_figure per share at that time the raifmans owned roughly of mediaplex and as a result of the market’s valuation of mediaplex the couple’s wealth was significantly bolstered during that initial offering period the raifmans however were unable to immediately capitalize on mediaplex’s success as their holdings were restricted and not readily marketable shortly after mediaplex went public the internet and technology markets tumbled and as a result the per-share value of mediaplex stock dropped below a dollar in date valueclick inc a competing internet advertising firm purchased mediaplex as a result of that purchase approximately million of the raifmans’ mediaplex shares were converted to interests in valueclick valueclick retained mr raifman’s services as a member of the valueclick board_of directors and as part of his compensation_for performing in this role provided him over big_number nonqualified options for the purchase of valueclick stock by the couple’s personal and professional lives began to evolve mrs raifman had left the workforce and mr raifman had resigned from his position on the valueclick board in tendering his resignation mr raifman exercised his nonqualified_stock_options purchasing big_number shares of valueclick stock at dollar_figure per share as the market price at that time was roughly dollar_figure per share the raifmans realized ordinary_income of dollar_figure per share or dollar_figure total mr raifman did not consult with any professional advisers or tax professionals before exercising his nonqualified options b objectives following the exercise of the valueclick options the raifmans wished to manage their wealth in a sustainable manner that would generate an income stream sufficient to sustain their then-current lifestyle for the remainder of their lives to this end the raifmans envisioned the assembly of a portfolio that would function as their personal endowment providing them annual disposable income of approximately dollar_figure net of all expenses and taxes and generating annual growth the raifmans were aware however of the fact that nearly all of their wealth was concentrated in valueclick stock informed by their earlier experience with mediaplex the raifmans knew that a portfolio composed of positions concentrated in a single company posed a hazard to one’s wealth and that to manage their wealth in a manner sufficient to meet their objectives their investment portfolio required diversity the raifmans began to seek help in developing their course of action initially they turned to family friend and neighbor steve glaser mr glaser was a former auditor who was operating a catering company while moonlighting as a financial consultant mr glaser informed the raifmans that they would need to initially fund their endowment with at minimum dollar_figure million mr glaser possessed neither the means nor wherewithal to deliver them the substance of their objectives but believed he knew someone that did possess such ability and means joe ramos both mr glaser and mr ramos had previously worked for arthur andersen where mr glaser had supervised mr ramos’ work as an auditor mr ramos was a licensed certified_public_accountant c p a during his employment at arthur andersen but by summer his career trajectory had turned toward the securities brokerage and financial planning industries although mr ramos had allowed his c p a licence to lapse he was a certified financial planner and operated his own investment advising firm ramos financial d b a private capital management ramos financial mr glaser knew that mr ramos’ financial planning practice catered to high net_worth individuals and used unique means and methods for meeting client objectives for these reasons mr glasser recommended that the raifmans meet with mr ramos while mr ramos independently owned and operated ramos financial he was also a managing director --an affiliate or functionally a franchisee--of the private consulting group pcg pcg was an investment advisory and securities brokerage firm founded by robert keys in the late nineties robert keys designed pcg to cater to the interests of high net_worth individuals and did so by offering in addition to standard brokerage and advising services access to designer opportunities for the empowerment of one’s true wealth notably pcg provided its clients access to numerous opportunities that enabled clients to reduce defer and in some cases avoid tax and to transform these tax efficiencies into additional sources of income wealth and equity 7to this end pcg offered a variety of tax efficiency strategies each tailored to address the spectrum of issues that pcg had found to routinely cause client concern for the client interested in liquidating appreciated stock pcg offered tax-efficient methods of asset monetization that could convert the client’s paper profits to currency for the client concerned with retirement pcg offered access to a tax-to-equity conversion plan designed to recover the client’s income_tax paid for prior years and place that recovered tax into exclusive vehicles to fund the client’s retirement for the client concerned about estate_tax and asset protection pcg offered access to leaders in the field of establishing offshore tax-advantaged vehicles designed to protect an individual’s wealth from unscrupulous creditors and frivolous lawsuits and minimize if not eliminate tax should these strategies appear suspect to skeptical potential clients pcg offered comfort noting that many of its true wealth strategies had received a should or more_likely_than_not tax opinion from a major accounting firm or law firm additionally pcg boasted that the wealth design professionals in its affiliated network--advisers lawyers and accountants--were intimately familiar with successfully implementing pcg’s true wealth strategies and would be at the immediate disposal of pcg its franchisees and their clients as necessary c mr ramos and his plan sec_1 the derivium program before meeting the raifmans mr ramos had been briefed by mr glaser with respect to the raifmans’ objectives accordingly mr ramos prepared a customized presentation identifying the strategies he believed best suited to provide the desired results in date mr ramos armed with this presentation and his pcg-affiliate marketing materials met with the raifmans and pitched to them a variety of proposals and investing strategies that ranged from the conservative to the nontraditional mr ramos reviewed each proposal in detail with mr raifman and mr glaser and the three collaborated in weighing the risks and rewards of each proposed strategy of these ramos proposals mr raifman was particularly intrigued by a nontraditional loan -based strategy proposed by mr ramos the stock loan program derivium8 program mr ramos was introduced to the derivium program through his affiliation with pcg derivium was one of pcg’s strategic alliance partners and 8derivium capital llc derivium usa bancroft ventures witco services ltd and optech ltd were entities directly related to charles cathcart and were the brand names under which mr cathcart peddled the stock loan program see 716_f3d_355 4th cir general holding inc v cathcart u s dist lexis at d s c date for clarity we refer to all as derivium implementing the derivium program’s asset monetization strategy was integral to effecting a tax-efficient true wealth optimization plan for pcg’s clients the derivium program was tailored toward individuals such as the raifmans who held concentrated positions in a single marketable_stock and wished to generate liquidity without triggering a taxable_event the derivium program facilitated this monetization of stock by lending program participants up to of their stock’s fair_market_value in return participants would surrender to derivium the ostensibly leveraged stock as collateral and would accrue interest on the loan principal over the life of the loan participants were prohibited from making any payments before loan maturity and similarly derivium was prohibited from calling the loan before maturity most importantly the loans were nonrecourse to the participant because a derivium loan was nonrecourse a participant had no personal liability for principal or interest and could instead choose--for example should the 9accordingly the terms of the program agreement provided derivium the unfettered right and power to assign transfer pledge repledge hypothecate rehypothecate lend encumber short sell and or sell outright some or all of the collateral during the loan term to the extent relevant the record before us establishes that derivium’s hedging strategy consisted of investing in startups founded or run by individuals related to the principals of derivium these startups eventually failed value of the participant’s stock drop over the agreement’s term--to default and cede the collateral to derivium alternatively upon maturity of the loan participants could pay their balance due and request return of their collateral or renew and refinance the loan for an additional term in order to monetize any appreciation of the collateral that occurred during the initial loan term we will refer collectively to these three choices as the alternatives to payment mr raifman and mr glaser recognized that the derivium program featured an inherent risk specifically the sustainability of its operations and its ability to perform on its potential obligations related to the raifmans’ alternatives to payment mr ramos explained that he too was initially skeptical with respect to derivium’s proprietary hedging strategy and readily admitted he was not privy to any specific details or mechanics of derivium’s proprietary hedging strategy but he noted that all sustainability risks considered the present_value of the tax savings and rate arbitrage10 promised by the derivium program functionally eliminated the raifmans’ exposure to risk 10that is these presumably tax-free loan proceeds would enable the raifmans to currently monetize cents on the fair_market_value dollar of their valueclick stock far better than the estimated cents of the same resulting from a market sale although the raifmans chose to implement a diverse set of strategies to achieve their objectives they ultimately also chose to participate in a series of derivium transactions in order to jump-start their planning before engaging in their first derivium transaction the raifmans directed mr ramos and mr glaser to meet an estate_planning attorney and c p a with whom the raifmans had previously worked to solicit his opinion with respect to the claimed tax benefits of the derivium programdollar_figure the attorney declined to provide them with his approval of the derivium transaction’s purported tax characterization but skeptically recommended that should the raifmans choose to participate in the derivium program they limit the extent of their participation and execute these transactions in a piecemeal fashion the raifmans sought no further legal or tax_advice with respect to the derivium program and never met or otherwise engaged with any agent representative or other employee of derivium in date roughly a month after first meeting mr ramos and hearing his initial pitch the raifmans decided to go forward with their first derivium 11the record appears to indicate that this attorney was arnold zippel whom the raifmans had previously engaged in order to establish a_trust the record contains no further facts with respect to the raifmans’ relationship with mr zippel transaction and transferred big_number shares of valueclick in exchange for dollar_figure an amount representing of that stock’s fair_market_value on date the raifmans formally retained mr ramos as their investment adviser later that month the raifmans engaged in their second derivium transaction this time exchanging big_number shares of valueclick for dollar_figure an amount representing of the stock’s fair_market_value in date the raifmans entered into a third derivium transaction by transferring big_number shares of valueclick in exchange for dollar_figure an amount representing of that stock’s fair market valuedollar_figure in date the raifmans engaged in their final derivium transaction this time exchanging big_number shares of valueclick for dollar_figure 12the raifmans executed this derivium transaction through their wholly owned cayman islands entity helicon this derivium transaction was part of an offshore tax-advantaged asset protection plan arranged through mr ramos by tim scrantom a pcg-affiliated wealth-design professional and attorney the raifmans organized helicon and contributed to that entity big_number shares of valueclick stock the raifmans then caused helicon to engage in a derivium transaction and route the proceeds of that transaction to a domestic entity khronos capital inc khronos khronos then lent the raifmans dollar_figure in exchange to secure this loan the raifmans provided khronos a deed_of_trust over their home the raifmans subsequently routed this money back to helicon along with the proceeds of a more conventional home equity loan provided by wells fargo the classicstar program during his initial july meetings with the raifmans mr ramos undertook a review of the raifmans’ tax items and the income_tax returns they had filed for years past from this review mr ramos ascertained that the exercise of mr raifman’s nonqualified valueclick options exposed the raifmans to a potential dollar_figure income_tax_liability for the tax_year his discovery of this potential liability led mr ramos to propose that the raifmans explore potential tax-to-equity strategies that might enable them to defer recognition of this ordinary_income and allow them to recapture_income tax paid for years past mr ramos began to introduce the raifmans to a series of his favored tax- to-equity strategies notably the classicstar mare leasing program the classicstar program offered individuals an opportunity to enter the thoroughbred horse breeding and racing businesses by enabling them to lease the reproductive capacity of classicstar’s mares for the duration of a thoroughbred breeding season during the term of the lease classicstar would mate these leased mares and any resulting foals would become the property of the participating lessee although classicstar disclaimed the notion that past results were indicative or a guaranty of future performance its promotional materials boasted that the sale of any resulting foal typically yielded participants a significant return on their investment but more important than those returns were the ostensible tax benefits classicstar claimed would result from participation in its program notably classicstar promoted its lease fees as a fully deductible farm business_expense that could shield current-year income from taxation and should that deduction exceed the participant’s current-year income could be carried back to recover tax paid for prior years classicstar noted that this shielding of ordinary_income in the current_year provided a future tax_benefit to participants upon the sale of any resulting foals as those gains realized would be taxed only at the preferential capital_gains_rate as an alternative classicstar also offered participants the opportunity to perpetually defer tax by way of like-kind_exchanges classicstar participants were given a due diligence booklet that provided them with guidance for drafting business plans and participation logs and contained a dvd and a set of tax opinions from accounting firm karren hendrix associates p c karren and law firm handler thayer duggan llc handler each explaining the tax benefits of the program however both classicstar’s marketing materials and the due diligence booklet encouraged all participants to seek independent tax_advice with respect to the benefits that might arise from participation in the classicstar program mr ramos calculated that if the raifmans purchased dollar_figure million of mare leases then they could completely offset the entire tax_liability arising from mr raifman’s option exercise and also recapture approximately dollar_figure of income_tax they had paid for prior years mr ramos explained to the raifmans his belief that the only risk posed in this respect was in establishing that the raifmans’ participation in the program constituted a bona_fide business venturedollar_figure mr ramos provided the raifmans a copy of the due diligence booklet for their review the raifmans reviewed these materials and decided to participate in the classicstar program on date the raifmans executed a letter of understanding with classicstar in the weeks that followed they paid classicstar dollar_figure million to participate in the programdollar_figure on date classicstar provided the 13mr ramos received a commission from classicstar for placing clients with the program mr raifman was aware of this fact mr raifman discussed the possibility of referring potential clients to mr ramos for the purpose of placing them with classicstar and splitting any commissions arising therefrom 14from december roughly three weeks after signing the letter of understanding formalizing their participation in the classicstar program mrs raifman attended a classicstar seminar in st croix where the topic of discussion was primarily the tax implications of having a horse breeding business mrs raifman’s contemporaneous notes from these seminars suggest the seminar’s predominant topic was how to generate material_participation in order to ensure the preservation of a tax deduction for the current_year continued raifmans with their mare leasing agreements and a breeding schedule all backdated to reflect execution on date the raifmans’ leases began retroactive to date and would expire date and projected that any resulting foals would be delivered in spring the raifmans’ leases explicitly warned that the lessees ie the raifmans bore all economic risk of loss should their leases fail to result in a foal and that by entering into this leasing agreement the lessees represented that they had evaluated and fully acknowledge the substantial financial risk inherent to participation in the mare leasing program before engaging in the program the raifmans never met or otherwise discussed the program with any classicstar employee agent or other representative nor did they seek legal or tax counsel with respect to their participation therein during the first quarter of mr ramos urged the raifmans to secure a personalized tax opinion with respect to their participation in classicstar and the continued upon her return the raifmans assembled their participation log for it reported that they engaged in hours of activity with respect to their participation in the classicstar program a total of hours was attributed to pre- participation diligence work eg visiting local california farms and reviewing the due diligence booklet a total of hours was attributed to reading blood horse magazine a total of hours was attributed to mrs raifman’s attendence at the st croix seminar a total of hours was attributed to the couple’s view- ing of six online horse breeding presentations on december and raifmans directed mr ramos to do so mr ramos did so by contacting handler the law firm that had provided the generic tax opinion included in the classicstar due diligence binder on date handler provided the raifmans with a generic tax opinion nearly identical to the one in the classicstar due diligence binder this tax opinion opened with an engagement letter disclosing to the raifmans handler’s conflicts of interest notably that handler served as general counsel to classicstar and that classicstar had paid for the production of this personalized tax opinion by date only two of the raifmans’ leased mares had become pregnant and their leasehold on their remaining mares had expireddollar_figure in date representatives of classicstar contacted mr raifman to propose a trade the raifmans would exchange their claim to the two in utero 15in date months after the raifmans’ mare leases had expired classicstar issued the raifmans a revised schedule of their mare breeding pairs the revised schedule reduced the number of leases that the raifmans had purportedly held and revised the identities of the breeding pairs associated with the raifmans’ failed mare leases the revised schedule also adjusted the lease and breeding costs for the raifmans’ two pregnant mares the revised schedule did not extend any leasing periods the record does not adequately reveal what precipitated this revision neither does it explain how this revised schedule might have otherwise altered the raifmans’ rights as lessees as again at the time of modification the raifmans’ leases had expired we observe that this revision occurred roughly at the same time the raifmans finalized and filed their tax_return in date foals as well as their other expired unfruitful leases for the rights to quarter horse pairs to be bred in spring with resulting foal delivery projected for spring additionally classicstar offered to make incentive payments to the raifmans and provide them an option to put all resulting foals to classicstar at a guaranteed price of dollar_figure we will refer collectively to this transaction as the quarter horse swap mr raifman directed classicstar to contact mr ramos and classicstar did so on date mr ramos contacted the raifmans and expressed enthusiasm for the swap and noted that in order to ensure that the tax advantages of the swap would be honored the raifmans ought to keep up their active participationdollar_figure on date the raifmans’ executed the quarter horse swap agreementdollar_figure the ramos investments the raifmans turned over the proceeds from their various derivium transactions to mr ramos who they then entrusted with managing that money in 16the parties considered this a like-kind_exchange 17the record indicates however that the raifmans did not provide classicstar with this executed agreement until sometime after date a manner sufficient to meet their objectives the raifmans were mr ramos’ largest clients and he afforded them the attention such a status deserved meeting with them regularly to discuss potential investments and to review the performance of their portfolio a the secured lending fund mr ramos recommended that the raifmans invest in the secured lending fund slf slf was a fund organized by robert keys the ceo of pcg and lee brower a pcg affiliate slf was in the business of making hard money or bridge loans to real_estate developers who had exhausted or otherwise could not secure financing from traditional lenders through a related company slf would vet potential borrowers and the associated underlying property however slf typically eschewed formal appraisals of the underlying property and would instead look only to past appraisals or rely on informal representations made by real_estate professionals familiar with the property and the surrounding area slf did not lend directly but instead facilitated its lending operations through a series of limited_liability companies sub-slfs each sub-slf would 18by late although he retained ownership and his position as pcg’s ceo robert keys’ primary focus was on his personal book of clients and investment opportunities he had delegated most of the company’s day-to-day operations to other pcg executives provide its borrower any requested funding in exchange for a security_interest in the borrower’s underlying real_estate development generally each sub-slf was funded by selling its debt to third parties sub-slf investors sub- slf investors would receive a note promising above-market yields and purporting to make a collateral_assignment of the sub-slf’s security_interest in the underlying real_estate development notwithstanding the nomenclature this collateral_assignment did not convey nor entitle sub-slf investors to receipt of or the right to record any security instrument the collateral_assignment did not purport to convey to any sub-slf investors a deed_of_trust mortgage or any other recognizable security_interest instead the intended function of this purported collateral_assignment was to establish that each loan made by a sub-slf was itself secured and to represent to sub-slf investors that if necessary the sub-slf could foreclose on and sell the underlying real_estate development in order to repay its investors mr ramos erroneously believed this meant that each note holder’s investment was a secured interest in the underlying real_estate development mr ramos represented his erroneous belief when selling mr raifman on investing with slf mr ramos presented mr raifman with the private placement memorandum ppm describing the slf operationdollar_figure the raifmans invested approximately dollar_figure million in sub-slf notes which they left under the management of mr ramosdollar_figure 19the slf ppm described the purported collateral_assignment as security for the sub-slf notes as follows although the notes will be limited recourse obligations of slf and each sub-slf each note will also be secured_by one or more collateral assignments made by slf and each sub-slf each collateral_assignment will assign to investors on a pari passu and pro rated basis all of the collateral that slf and each sub-slf receive from their borrowers each sub-slf borrower will pledge real_estate in addition to other acceptable collateral to secure bridge loans made by slf and each sub-slf slf and each sub-slf will collaterally assign all of the collateral that slf and each sub-slf receive from their borrowers the ppm with respect to the purpose and intent of the collateral_assignment is equally abstruse providing that the collateral_assignment is intended to make investors secured creditors of slf and each sub- slf in the unlikely event of a slf or sub-slf bankruptcy 20mr ramos established the real return fund in late as a limited_partnership generally mr ramos would request that his clients contribute those assets under his management into the fund because this would benefit all his clients as the collectivization of risk reduced the exposure of each individual client upon contribution each of his clients would become a partner in the partnership the raifmans agreed to this collectivization of risk and put approximately dollar_figure million of their ramos-managed investments and other assets continued ultimately because of the high-risk nature of the loans made and a downturn in the real_estate market the sub-slfs were forced to foreclose on almost all of the real_estate developments to which they had extended loans these foreclosures however were often mired in dispute and rarely resulted in investor repayment b a stroke of genius prints and advertising debt mr ramos also presented the raifmans with an opportunity to invest in debt issued for the print and advertising campaign p a of a feature-length motion picture bobby jones a stroke of genius although he lacked any familiarity with motion picture financing and understood that this debt was unsecured and risky mr ramos felt this investment was a can’t miss opportunity as the debt carried a interest rate and featured a back-end sweetener that promised p a investors an equity stake in the film should it succeed at the box officedollar_figure mr ramos informed the raifmans that both he and mr glaser had personally invested in the p a debt mr ramos provided mr continued into the real return fund for convenience we distinguish between slf investments and the real return fund only where necessary 21ideally mr ramos noted the film only needed to gross dollar_figure million in order to ensure that investors received the desired results raifman with the private_placement offering materials for the p a debt in date the raifmans agreed to purchase dollar_figure of notes issued by p a the film underperformed at the box office on date mr ramos wrote to his clients to inform them that he considered the p a debt worthless and to acknowledge errors in his judgment accordingly mr ramos refunded to his clients all management fees he had collected with respect to the p a debt and recommended that his clients write off their entire investment ii the raifmans’ return and subsequent audit a shopping for an adviser in early the raifmans directed mr ramos to meet with tim jorstad their longtime c p a to discuss the tax effects of their participation in the classicstar program following that meeting the raifmans informed mr ramos that they had dismissed mr jorstad and they requested that mr ramos refer them to another c p a to begin preparing their tax_return mr ramos referred the raifmans to and the raifmans subsequently engaged don shaw a licensed c p a and the father-in-law of one of mr ramos’ employeesdollar_figure 22the raifmans hired mr shaw approximately four months after they had engaged in the classicstar program mr shaw’s contract with the raifmans specifically limits the scope of his duties and responsibilities as their return preparer following a conversation with mr ramos and agents of classicstar mr shaw accepted the representation that the raifmans were engaged in a bona_fide horse breeding trade_or_business despite lacking any particular belief that the raifmans had any business_purpose for participating in the classicstar program beyond capturing the program’s tax benefits accordingly mr shaw reported the raifmans classicstar buy-in as a deductible dollar_figure million agribusiness expense for tax_year relying on mr ramos’ representation that the derivium transactions constituted bona_fide loans mr shaw did not report as income any of the proceeds received therefrom and for the same reason he did not review any of the related contracts or other relevant materials mr shaw proceeded in a similar fashion with respect to deducting derivium interest_expenses on the raifmans’ tax returns for the years at issue on date mr shaw completed the raifmans’ return for tax_year and mr ramos informed the raifmans that they should expect a prompt federal_income_tax refund of half a million dollars 23mr shaw testified that he principally and directly dealt with mr ramos-- probably percent of the time--with respect to any matters related to the raifmans’ returns mr shaw remained the raifmans’ return preparer through tax_year mr shaw used the same approach to coordinating and completing those returns as he had with the return b auditing the raifmans’ tax_return in the internal_revenue_service irs began an examination of the raifmans’ tax_return for the irs initially selected the raifmans’ return for examination because mr shaw failed to report any_tax consequence associated with the exercise of mr raifman’s nonqualified valueclick options once the examination began however the irs soon expanded its scope to include review of the raifmans’ participation in the derivium and classicstar programs mr shaw initially represented the raifmans during this examination and closely coordinated his representation with mr ramos as the examination progressed mr shaw and mr ramos became increasingly concerned with preserving the treatment of the raifmans’ participation in the classicstar program and their associated multiyear refund claim accordingly mr shaw began to coordinate directly with classicstar representatives specifically as the examination continued the irs began to question mr shaw with respect to the raifmans’ quarter horse swap earlier classicstar had directed mr shaw to refrain from providing the auditor any documentation or information with respect to the quarter horse swap in the hope of preserving its treatment as a like- kind exchange sensing that the auditor’s interest in this issue could further complicate the examination mr shaw contacted classicstar to develop a coordinated response to the irs’ now-expanding inquiry the classicstar solution however led to mr shaw’s routinely presenting the irs examiner with fabricated and otherwise uncorroborated reports with respect to the raifmans’ purported horse breeding business subsequently at the recommendation and initially the expense of classicstar the raifmans engaged a law firm to represent them before the irs examiner the examination of the raifmans’ tax_return closed when the raifmans entered into a closing agreement25 wherein they conceded liability for a dollar_figure deficiency in tax and agreed that their participation in the classicstar program was a nondeductible expense the examination of their returns for the years at issue continued however on date respondent issued a notice_of_deficiency determining the 24classicstar ceased to pay for the raifmans’ legal representation sometime in mid-date at that time the raifmans independently retained the same firm to continue to represent them before the irs 25the raifmans’ failure to pay the tax assessed pursuant to this closing_agreement gave rise to their associated cdp case discussed supra note raifmans had income_tax deficiencies for the years at issue the deficiencies reflected as relevant here respondent’s disallowance of interest_expense deductions related to derivium transactions for tax years deductions for additional classicstar expenses for tax_year a theft_loss deduction exceeding dollar_figure million for tax_year and a determination that the raifmans had underreported their capital_gain income for tax_year from their participation in the derivium program iii collapse and aftermath a derivium as the examination of the raifmans’ return continued their first derivium transaction neared maturity derivium contacted the raifmans to notify them of this approaching maturity_date and to remind them of their possible alternatives to repayment at that time date valueclick had appreciated significantly to the extent that the raifmans realized that the value of the shares they had originally transferred now exceeded the principal and interest due on their loan accordingly the raifmans directed mr ramos to pursue their available alternatives to payment specifically to request that derivium return to them an amount of valueclick shares equivalent to the excess of appreciation of the collateralized valueclick stock over their balance due derivium however failed to honor this request derivium also failed to honor the raifmans’ secondary request to extend the term of the agreement to refinance in exchange for cash proceeds equal to the as-yet uncaptured appreciation of the collateralized valueclick stock the derivium-related entities were regularly collapsing or dissolvingdollar_figure on date mr cathcart the principal of the derivium program was permanently enjoined from promoting it as it constituted an abusive_tax_shelter following the complete collapse of derivium and all associated entities the raifmans joined by a number of other former derivium participants attempted to sue wachovia for its role in facilitating the transfer of participants’ shares to derivium on date the u s district_court for the northern district of california dismissed the participants’ claims in may of the court_of_appeals for the ninth circuit affirmed the judgment of the district_court 26a year earlier in date derivium had filed a voluntary petition for chapter bankruptcy protection on date noel murphy don shaw’s son-in-law brought to mr ramos’ attention a forbes article detailing the collapse-in-progress of derivium and its related entities b classicstar in date government agents raided the offices of classicstar on the suspicion that classicstar was in the business of operating abusive tax sheltersdollar_figure meanwhile the irs examination of the raifmans’ participation in the classicstar program was expanding mr raifman began pressing mr ramos to pursue the incentive payments promised in the quarter horse swap and to further pressure classicstar to provide the raifmans a refund of their original dollar_figure million participation fee on date classicstar wired the raifmans dollar_figure as part of the incentives payments arising from the quarter horse swap aware that the raifmans’ irs examiner was beginning to expand her inquiry to include review of the quarter horse swap mr ramos also began demanding that classicstar provide documentation specifically proof of birth and registration with respect to the horses associated with the swap classicstar failed to produce 27the record suggests that the raifmans discovered that classicstar was under investigation only when they were contacted by the department of justice doj in august of pursuant to that initial contact the raifmans were offered immunity from prosecution for any federal crime on the basis of statements they provided pursuant to an immunity agreement including but not limited to violations of sec_7201 and sec_7206 criminal_tax_evasion and criminal false statements to the taxing authorities respectively the raifmans accepted these offers of immunity roughly a year later in date this information classicstar and its attorneys did however continue to work with both mr ramos and the raifmans to arrive at an acceptable settlement to compensate the raifmans for classicstar’s failures a number of the principals of the classicstar program were indicted for and pleaded guilty to conspiracy to defraud the u s government through their operation and promotion of the classicstar program in a related civil lawsuit the raifmans and numerous other classicstar participants were collectively awarded damages in excess of dollar_figure million resulting from classicstar’s fraud see west hills farms llc v clasicstar farms inc in re classicstar mare lease litig 727_f3d_473 6th cir pursuant to that disposition the raifmans between and settled a number of associated claims against other parties who had directly facilitated or aided in the classicstar program’s fraud receiving settlements of dollar_figure from handler in dollar_figure from karen hendrix in and dollar_figure collectively from gasstar classicstar’s parent company and associated individuals c mr ramos and mr keys as the examination of their returns continued into date the raifmans dismissed mr ramos generally from his investment advisory duties however they did not completely remove their assets from his management believing there was still value in allowing their investments in slf to mature accordingly they retained mr ramos to continue managing such until when mr ramos resigned at the time of his resignation mr ramos informed the raifmans that it might take as long as five years to unwind and liquidate their remaining investments because of issues with particular assets but most notably because of tax concerns arising from the raifmans’ offshore investment vehicles in date the raifmans entered arbitration with mr ramos pcg and mr keys alleging among other things numerous breaches of fiduciary duty including self-dealing and nondisclosure breach of contract negligence fraud and misrepresentation after days of hearings the arbitrator determined that mr ramos had failed to adequately disclose referral fees and commissions he had received from the operators and promoters of many of the investments and programs that he had sold the raifmans and the fee sharing aspects of his relationship with pcg the arbitrator also determined that robert keys in his role as ceo of pcg had a conflict of interest in that he encouraged pcg and its affiliates to promote investment vehicles he had founded or which would result in the largest commissions to him personallydollar_figure 28the arbitrator also laid out the deficiencies in mr ramos’ comprehension of the nature of the slf notes in which he had encouraged the raifmans to invest continued accordingly on date the arbitrator ruled that mr ramos and pcg were liable for among other things breaching their fiduciary duties to the raifmans the arbitrator did not however hold that mr ramos and mr keys had committed common_law fraud instead owing to their breaches of duty and care the arbitrator held that they were liable for having worked a constructive fraud on the raifmans as the arbitrator specifically found that neither mr keys nor mr ramos acted with any intent to deceive or defraud the raifmans accordingly the arbitrator generally awarded the raifmans damages arising from among other things their participation in the classicstar dollar_figure million and derivium dollar_figure programs and their investments in the p a and slf notes dollar_figure and dollar_figure respectively mr ramos ramos financial mr keys and pcg were held jointly and severally liable for those damages shortly after the arbitrator delivered his decision mr ramos filed for bankrupcy protection the raifmans intervened and secured a settlement agreement with mr ramos wherein he promised to pay them dollar_figure pursuant continued and the deficiencies in slf’s borrower vetting and loan issuance procedures at the time of the arbitration proceedings slf had begun to foreclose on nearly all of the properties for which it had extended loans the record at arbitration revealed that slf had regularly failed to adequately evaluate the properties itself and had insufficient capital to ensure it could adequately seize the troubled properties to the arbitration and agreed to testify on their behalf in any further actions brought against mr keys or in any further proceedings with the taxing authorities on date the raifmans filed a suit in the superior court of california county of san francisco naming as defendants among others mr keys slf and related sub-slf entities the raifmans alleged the defendants had among other things perpetrated securities fraud and actual fraud the raifmans moved to voluntarily dismiss this action on date on date mr keys filed for chapter bankruptcy protection mr keys subsequently pleaded guilty to wire fraud and money laundering offenses with respect to a dollar_figure million loan he brokered between a longtime client and a recent business_associate and bankruptcy fraud opinion i the theft losses a the nature of the parties’ contentions the raifmans do not dispute respondent’s determinations as set forth in the notice_of_deficiency with respect to their participation in the derivium and classicstar programs instead they argue that the facts and circumstances surrounding their participation in those programs as well as their investment in the slf notes ought to entitle them to deduct theft losses for tax_year dollar_figure the raifmans argue a unique theory with respect to each loss these theories are as follows with respect to their derivium transactions the raifmans argue that each transaction was two separate transactions the sale of their stock to derivium and their purchase of an option to reacquire from derivium an identical amount of stock at maturity for a strike_price equal to their balance duedollar_figure in this respect the raifmans allege that derivium’s failure to honor these options at the maturity of their first agreement and derivium’s subsequent collapse before the maturity of their second and third agreements constitute the theft of those options by false pretenses the raifmans appear to specifically allege that they were intentionally defrauded by derivium’s principal mr cathcart 29although in their original return the raifmans claimed a dollar_figure theft_loss they now appear to claim only a dollar_figure theft_loss this loss comprises individual losses of dollar_figure related to their participation in the classicstar program dollar_figure related to their direct transactions with the derivium program dollar_figure related to their derivium transaction routed through helicon and dollar_figure with respect to their investments in slf notes and as associated with the real return fund 30the raifmans’ argument appears to rely on 135_tc_26 aff’d 691_f3d_1315 11th cir there this court characterized the alternatives to payment as being at best an option to purchase from derivium an equivalent amount of stock for a price equal to the principal and accrued interest on the purported loan id pincite with respect to classicstar noting that respondent has conceded that an actual theft occurred the raifmans allege that the classicstar program constituted a ponzi scheme and seek to avail themselves of the safe_harbor provisions provided by revproc_2009_20 2009_14_irb_749 with respect to their investments in slf notes the raifmans allege that mr keys and other principals of slf defrauded them by misrepresenting the nature of their investment in slf notably that the notes did not convey to the raifmans any security_interest in any underlying propertiesdollar_figure with respect to derivium and slf respondent alleges that the raifmans failed to establish that an actual theft occurred notably because the raifmans have failed to establish the criminal intent of mr cathcart or mr keys with respect to their participation in the classicstar program respondent argues that the raifmans have failed to establish the appropriate amount of their theft_loss and the appropriate year of its deduction respondent additionally contends that the raifmans are ineligible for safe-harbor treatment under revproc_2009_20 supra 31the raifmans do not allege privity with mr keys or any other agent or principal of slf rather they allege that the misrepresentations made by those individuals to mr ramos and subsequently communicated to the raifmans by mr ramos resulted in a theft by false pretenses because they do not constitute qualified investors and the classicstar program does not constitute a specified fraudulent arrangement as defined b theft_loss analysis sec_165 generally permits taxpayers to deduct against their ordinary_income the amount of any uncompensated loss resulting from theft for the year in which the taxpayer sustains that loss see sec_165 c e to qualify for a theft_loss deduction taxpayers must prove the occurrence of a theft the amount of the theft_loss and the year in which the taxpayers discover the theft_loss id the taxpayer bears the burden of proving entitlement to a theft_loss deduction rule a 290_us_111 in order to ascertain whether theft has occurred this court applies the law of the state where the loss was sustained 540_f2d_448 9th cir aff’g 61_tc_354 because the alleged theft took place in california we apply california law under california penal code section any person who shall feloniously steal take carry lead or drive away the personal_property of another or who shall knowingly and designedly by any false or fraudulent representation or pretense defraud any other person of money or real or personal_property will be held accountable for theft cal penal code sec a deering while this statute endeavors to consolidate all theft offenses within its terms the state of california still recognizes that the individual elements of each permutation of theft--such as larceny false pretenses embezzlement--have remained unchanged people v gonzales p 3d cal people v ashley p 2d cal insofar as the raifmans allege theft through fraudulent misrepresentations they allege theft by false pretenses theft by false pretenses consists of three conjunctive elements the perpetrator must knowingly and with the specific intent to defraud the property owner have made a false representation or pretense which materially influenced the owner to part with his or her property in reliance on those representations people v williams p 3d cal implicit in these elements is a relationship of privity between the perpetrator and his or her victim crowell v commissioner t c memo dollar_figure 32in certain narrow circumstances a theft_loss deduction has been allowed where the taxpayer lacks privity with the alleged thief see 768_f2d_1140 9th cir rev’g 82_tc_804 the raifmans do not allege privity with mr cathcart mr keys or any other agent or principal of derivium or slf instead the raifmans argue that our analysis ought to look beyond privity and to apply a feeder theory to our theft_loss analysis as suggested in 63_tc_736 aff’d without published opinion 523_f2d_1053 5th cir and jensen v commissioner tcmemo_1993_393 aff’d without published opinion 72_f3d_135 9th cir as we reach our holding on the question of intent however we need not and do not continued intent to defraud is a question of fact to be determined from all the circumstances of the case and usually must be proven circumstantially people v fujita cal rptr ct app courts must examine the evidence to determine whether an alleged thief behaved in a manner consonant with an intent to defraud a record establishing a mere ordinary breach of contract or fiduciary duty will be insufficient to support a finding of a party’s intent to defraud see ashley p 2d pincite c derivium the raifmans argue they are entitled to a theft_loss deduction arising from their participation in the derivium program as the raifmans see it the alleged theft relates to derivium’s failure to honor the options arising from the agreements’ alternatives to payment to establish the requisite criminal intent with respect to this theft claim the raifmans rely nearly exclusively on a permanent injunction enjoining mr cathcart the derivium principal from continuing to promote and operate that program the district_court for the northern district of california entered this permanent injunction against mr cathcart pursuant to sec_7408 continued address the raifmans’ feeder theory or otherwise analyze any issue pertaining to matters of privity sec_7408 authorizes the federal district courts to enjoin individuals who have engaged as relevant here in the promotion of abusive tax_shelters when it is shown that an individual organized or sold or participated in the organization or sale of an arrangement and made or caused to be made false statements concerning the tax benefits to be derived from that arrangement while knowing or having reason to know the falsity and materiality of those false statements see eg 202_f3d_1093 9th cir we do not find this injunction and the associated materials to be dispositive with respect to the raifmans’ theft claim while the injunction may be highly probative with respect to mr cathcart’s intent to develop and market an abusive_tax_shelter it does not follow that mr cathcart conceived and implemented the program options the alternatives to payment with the specific intent to defraud the raifmans or any other participant of his tax_shelter of their propertydollar_figure 33the government was granted summary_judgment with respect to the falsity of the derivium program’s purported tax benefits trial was to be held in order to resolve primarily the disputed factual question of whether mr cathcart knowingly misrepresented those tax benefits at trial he declined to contest this remaining factual allegation accordingly he was enjoined from promoting the derivium program or any other program similar thereto rather the injunction gives rise to a strong inference that mr cathcart’s intent was to develop and market a tax_shelter that might disguise sales as a lending arrangementdollar_figure in order to ensure that the sales would be honored as the nonrecourse loans they purported to be the transaction necessitated pro forma documentation that would suggest the existence of bona_fide indebtedness accordingly mr cathcart developed the loan agreements specifically the alternatives to payment at issue here in a manner that he believed would provide his program the veneer necessary to help it survive scrutiny and deliver his clients the tax benefits he promised the agreement and its terms the alternatives to payment were part and parcel of the derivium transaction’s nature as a disguised sale to the extent we find the injunction and the other derivium-related materials indicative of any intent we find only that mr cathcart intended to market a tax_shelter and to aid and abet in the defrauding of the u s treasury on the record before us we do not find evidence sufficient to establish that he intended to defraud any individual derivium participant through a failure to 34the contracts clearly indicated to the participants that in turning over their property to derivium they were transferring thereto all the benefits and burdens of and complete dominion over the stock the loan was nonrecourse to the participant and could not be called before maturity similarly the participants were prohibited from prepaying any interest or principal perform on the program’s ill-conceived options the alternatives to payment accordingly the raifmans have failed to establish the requisite intent necessary to sustain their derivium-related theft claimdollar_figure d secured lending fund the raifmans argue they are entitled to a theft_loss deduction arising from their investment in slf the raifmans allege that mr keys misrepresented and caused others to intentionally misrepresent the nature of the collateral_assignment integral to the sub-slf notes and that mr keys did so with the intent of depriving investors of their money to establish the requisite intent of mr keys the raifmans rely on the testimony of mr ramos and an expert report mr ramos repeatedly testified that mr keys lied to him with respect to the nature of slf and the associated collateral_assignment the weight of the entire record however establishes that mr keys had little contact with mr ramos and 35the raifmans have entered into the record an expert report purporting to provide a valuation of these theoretical options to establish the fair_market_value thereof additionally the raifmans argue that they are entitled to a step-up_in_basis because the derivium transaction did not constitute a literal sale but rather a constructive_sale under sec_1058 because we decide the issue of theft on the existence of intent we decline to explore these aspects of the raifmans’ claim we observe however that respondent’s initial determination with respect to the proper tax treatment of the derivium transaction appears to have already accounted for the of the market_value of their valueclick stock which was not monetized in the derivium sale see calloway v commissioner t c pincite halpern j concurring does not establish that in their limited communications mr keys ever willfully communicated any material misrepresentation with respect to slf and its purported collateral_assignment with an intent to defraud mr ramos or his clientsdollar_figure we observe that the ppm details the nature and operation of the collateral_assignment and that the terms it employs in doing so are arguably ambiguous the record before us does not however establish that mr ramos mr keys or any other individuals associated with slf were at odds with respect to how they interpreted the term collateral_assignment and how such a collateral_assignment was to operate the record establishes that the principals of slf understood that they were obligated to collaterally assign any collateral received from their borrowers to slf investors the principals of slf understood this to mean that slf investors would be entitled to repayment of their limited recourse notes from the proceeds of foreclosure the record similarly establishes that mr ramos having read the ppm and done the due diligence required of him arrived at a similar understanding that mr ramos and others then began describing the notes issued by slf as secured appears to belie their 36as respondent notes in california the misrepresentation or omission of a material fact in the offering or selling of a security may be unlawful cal corp code sec deering such a misrepresentation however will be considered criminal only when it is made wilfully ie intentionally id sec b people v salas p 3d cal comprehension as to the actual meaning function and operation of a security_interest but it certainly does not give rise to an inference of willful misrepresentation with the intent to defraud investors accordingly we find that the testimony of mr ramos lacked credibility and reliability and failed to establish that mr keys or any other slf principal exhibited the intent necessary to sustain the raifmans’ allegations of theftdollar_figure the expert report offered by the raifmans re-interprets the factual findings and holdings of the raifmans’ arbitration with mr ramos and mr keys in order to arrive at the determination that the actions of mr keys were categorically fraudulent and that the entirety of the raifman’s sic experience with mr keys and associated entities was based on fraud the report purports to arrive at this conclusion through an application of the industry standards of care for investment advisers to the extent the expert report is meant to support a conclusion that mr keys defrauded the raifmans it is unhelpful the report does not invite our attention to any particular indicia of the willful intent of mr keys to defraud the 37we observe that the raifmans have entered into the record numerous documents related to guilty pleas entered by mr keys with respect to unrelated crimes to the extent the raifmans invite us to infer by way of propensity evidence that mr keys intended to defraud them we decline to do so raifmans or any other slf investor moreover the report primarily summarizes the arbitration opinion and in doing so appears to conflate breaches of fiduciary duties and industry standards of care with the relevant california law germane to our analysis under section dollar_figure we recognize that fraud may take many forms but the defects and redundancy of this report lead us to accord it very little weight with respect to establishing that mr keys or any other party related to the slf investments acted with an intent to defraud the raifmans e classicstar concession positions and the remaining elements in a response to a motion for summary_judgment filed by the raifmans respondent conceded that the raifmans suffered a theft pursuant to their participation in the classicstar program recognizing respondent’s concession our analysis turns to the remaining two elements of a theft_loss the correct year of a deduction and the correct amount of the deduction the raifmans however argue that the classicstar program constituted a ponzi scheme and rely exclusively on revproc_2009_20 supra in inviting this court to hold the same in accordance with revrul_2009_9 2009_14_irb_735 38this is perhaps to prevent the report from appearing to offer an impermissible legal conclusion see 523_f3d_1051 9th cir accordingly the raifmans argue that they are entitled to a theft_loss deduction of dollar_figure the raifmans do not however allege a specific context for the theft here conceded and they do not identify the nature of the property stolen similarly they do not attempt to establish the fair_market_value of or their basis in the unidentified stolen property the provisions of revproc_2009_20 the raifmans allege the classicstar program constituted a ponzi scheme and ask this court to apply revproc_2009_20 supra to afford them a theft_loss deduction in accordance with the commissioner’s disposition in that revenue_procedure we observe that revenue procedures and revenue rulings are not necessarily binding on this court see 613_f2d_770 9th cir aff’g in part rev’g in part 64_tc_404 and note that to the extent this court might apply this revenue_procedure we would not hold that the raifmans qualify for beneficial treatment thereunder as pertinent here revproc_2009_20 supra provides a safe_harbor for a taxpayer who is a qualified investor that unwittingly experienced losses by way of participation in certain specified fraudulent arrangements this procedure 39this amount appears to represent the raifmans’ initial classicstar participation fee reduced in acknowledgment of their receipt of various incentive and settlement payments generally relaxes the showing required of a taxpayer with respect to the timing and amount of a theft_loss when a taxpayer qualifies for the safe_harbor treatment the commissioner will not challenge that taxpayer’s theft_loss deduction of the full amount of the taxpayer’s investment for the tax_year in which the theft was discovered a qualified investor is a taxpayer who did not have actual knowledge of the fraudulent nature of the arrangement before its becoming known to the general_public additionally the arrangement must not constitute a tax_shelter as defined in sec_6662 as relevant here sec_6662 defines a tax_shelter as any investment plan or other arrangement whose significant purpose is the avoidance or evasion of federal_income_tax an investment plan or other arrangement will be considered principally significantly motivated to avoid taxation if that purpose exceeds any other purpose sec_1_6662-4 income_tax regs the existence of an economic motivator will not itself establish that a transaction’s principal purpose is not the sheltering of income from taxation if objective evidence indicates otherwise id mr ramos introduced the raifmans to the classicstar program principally because mr ramos believed it could offset the raifmans’ phantom tax_liability arising from their exercise of mr raifman’s nonqualified valueclick options mr ramos determined with exactitude the amount of money that the raifmans’ would need to buy into the classicstar program in order to offset that liability and provide them a net_operating_loss large enough to secure a refund of their federal_income_tax paid for prior yearsdollar_figure moreover the record is replete with depositions and testimony wherein mr ramos mr shaw and mrs raifman stated that the raifmans’ principal purpose for participating in the classicstar program was to avoid income_tax for and recover income_tax paid for previous years the weight of the evidence before us fails to establish that the raifmans participated in the classicstar program for any significant purpose other than the avoidance of federal_income_tax we find that the raifmans do not constitute qualified investors and accordingly they could not qualify for the safe_harbor provisions of revproc_2009_20 supra the amount of the classicstar theft losses the amount of a theft_loss is limited to the lesser_of the fair_market_value of the property immediately before the theft or the adjusted_basis of the stolen 40we also observe that in this manner the classicstar program was designed to operate as an artful device that enabled its participants to shelter ordinary_income from taxation for a current_year and to convert ordinary_income into capital_gain income a short time later see eg 356_us_260 citing 350_us_46 property sec_165 sec_1_165-7 sec_1_165-8 income_tax regs a taxpayer may not however deduct a theft_loss to the extent he or she has recovered or been compensated for that loss sec_165 see doud v commissioner tcmemo_1982_158 to the extent established by the record before us we find that the raifmans were victims of a theft arising exclusively in the context of the material misrepresentations made by classicstar to induce their acceptance of the quarter horse swap agreement similarly we find that the property the raifmans conveyed in reliance on those misrepresentations was their interests in the two unborn foals and any rights arising from their unfruitful mare leases that had previously expired on date the record establishes base sec_41 for these two in utero foals of dollar_figure and dollar_figure 41with respect to the amount of their theft_loss the raifmans relied exclusively on revproc_2009_20 2009_14_irb_749 as discussed above accordingly they declined to offer any data or calculations indicative of the fair_market_value of the rights arising from their expired leases did not invite our attention to any data or calculation with respect to any collateral expenses_incurred pursuant to their attempts to recover their property and have advanced no associated argument with respect thereto see 47_tc_592 the year of loss generally taxpayers may deduct a loss only for the year such loss is sustained sec_165 with respect to theft losses however taxpayers are permitted to treat the theft_loss as being sustained during the taxable_year in which the taxpayer discovers the theft sec_165 taxpayers may not however claim a theft_loss deduction for a year in which he or she may still have a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery sec_1_165-1 and income_tax regs a reasonable_prospect_of_recovery will postpone the theft_loss deduction until such time as that prospect no longer exists sec_1_165-1 income_tax regs the raifmans among other investors concluded litigation against classicstar and its parent corporations in and have been routinely recovering from related parties since initiating litigation with classicstar in accordingly we reject the raifmans’ claim that is the proper year for them to recognize their theft_loss associated with their participation in the classicstar program ii the investment in p a notes as a worthless_security capital_loss the raifmans argue that they ought to be allowed to deduct a long-term_capital_loss for tax_year with respect to their investment in the p a notes if a security which is a capital_asset becomes worthless during the taxable_year sec_165 allows a taxpayer to deduct the loss resulting therefrom as a capital_loss a security for these purposes constitutes a bond a note or other evidence_of_indebtedness issued by a corporation sec_165 individuals may deduct capital losses to the extent of capital_gains plus dollar_figure of ordinary_income sec_1211 a taxpayer seeking a deduction for a worthless_security must among other things prove the actual worthlessness of the security a taxpayer may claim such a deduction only for the first year in which there is no reasonable chance of recovery sec_1_165-4 income_tax regs see vincentini v commissioner tcmemo_2008_271 slip op pincite aff’d 429_fedappx_560 6th cir favia v commissioner tcmemo_2002_154 if in the year of discovery there exists a claim for reimbursement with respect to which there is a reasonable_prospect_of_recovery no portion of the loss for which reimbursement may be received may be deducted until the taxable_year in which it can be ascertained with reasonable certainty whether or not the reimbursement will be received for example by a settlement adjudication or abandonment of the claim sec_1_165-1 sec_1_165-5 sec_1_165-8 income_tax regs as with theft losses taxpayers may deduct a worthless_security loss only to the extent not compensated sec_165 the record establishes that the raifmans invested dollar_figure in the p a notes these notes are a security within the meaning of sec_165 the money owed the raifmans on those notes is unlikely to ever be paid in date the raifmans were awarded dollar_figure with respect to this investment pursuant to their arbitration involving mr ramos mr keys and pcg accordingly the proper year of loss is not as the raifmans claim but a later year that the record does not establish iii sec_6662 accuracy-related_penalties respondent determined that for all years at issue the raifmans were liable for accuracy-related_penalties under sec_6662 and b and for negligence disregard of rules or regulations or substantial understatements of income_tax the raifmans contest the imposition of these penalties a taxpayer is liable for a sec_6662 accuracy-related_penalty with respect to any portion of an underpayment attributable to negligence or disregard of rules and regulations or a substantial_understatement_of_income_tax sec_6662 and b and negligence occurs when the taxpayer fails to make a reasonable attempt to comply with the provisions of the code while disregard of rules and regulations means any careless reckless or intentional disregard thereof sec_6662 sec_1_6662-3 income_tax regs stating that a taxpayer exhibits negligence when he or she fails to make a reasonable attempt to ascertain the correctness of a deduction credit or exclusion which would seem to a reasonable and prudent person to be ‘too good to be true’ under the circumstances a substantial_understatement_of_income_tax exists when the amount of the understatement exceeds the greater of of the tax required to be shown on the return for the taxable_year or dollar_figure sec_6662 the commissioner bears the burden of production with respect to the accuracy-related_penalty under sec_6662 sec_7491 116_tc_438 a graev implications this case was tried during the court’s date trial session in san francisco california the record remained open until date before the court closed the record in this case neither party attempted to introduce evidence with respect to the written supervisory approval requirement of sec_6751 briefing was completed on december dollar_figure 42shortly after the conclusion of trial this court released graev v commissioner graev ii 147_tc_460 supplemented and overruled in continued on date this court released graev v commissioner graev iii t c __ date supplementing and overruling in part 147_tc_460 in graev iii t c at __ slip op pincite as pertinent here this court held for the first time that as part of his burden of production the commissioner must offer into the record evidence of his compliance with the written supervisory approval requirement of sec_6751 on date we ordered the parties to address the effect of graev iii on this case and to file any associated motions by february dollar_figure on date respondent filed a motion to reopen the record and the declaration of theresa alvarez in support of that motion collectively respondent’s motion revenue_agent theresa alvarez ra alvarez was tasked with examining the raifmans’ returns for the years at issue respondent’s motion continued part by graev v commissioner graev iii t c __ date where we held that the commissioner was only required to comply with the written supervisory approval requirement of sec_6751 before the actual assessment of applicable penalties at the close of the record and through the completion of briefing graev ii was controlling in this case 43on date respondent filed a response to our order dated date notifying the court that he had informed the raifmans about the penalty approval form on date and informing the court and the raifmans of his intent to file a motion to reopen the record see fed r evid seeks to reopen the record to add documentary_evidence that might establish his compliance with the written supervisory approval requirement of sec_6751 respondent’s motion includes a penalty approval form and negligence or disregard of the rules or regulations lead sheet c collectively penalty approval form the penalty approval form indicates that it was prepared by ra alvarez with respect to her examination of the raifmans’ returns for the years at issue a signature dated date appears on the penalty approval form in the space provided for group manager approval to assess penalties identified above in her declaration ra alvarez states that this signature is that of her then-immediate supervisor robert gee and that she is already familiar with the signature of mr gee who regularly signed documents she had prepared during his tenure as her immediate supervisor ra alvarez additionally states that this penalty approval form was drafted contemporaneously with her examination of the raifmans’ returns for the years at issue and that these forms are of the type that employees of the irs regularly create and keep in the course of ordinary business on date the raifmans filed a competing motion to reopen the record raifmans’ motion the raifmans’ motion objects to respondent’s motion only insofar as the raifmans request that any reopening of the record also afford them the opportunity to cross-examine mr gee and to again cross-examine ra alvarez to this extent the raifmans’ motion argues that the penalty approval form fails to establish that ra alvarez and mr gee adequately considered their reasonable_cause defense to the accuracy-related_penalties under sec_6662 for the years at issue on date we ordered the parties to respond to these competing motions to reopen the record and the parties complied the decision to reopen the record to admit additional evidence is a matter within the discretion of the trial_court 401_us_321 see also 503_f2d_359 9th cir aff’g tcmemo_1971_200 this court however will not exercise such discretion unless the evidence that a party seeks to admit to the record is material and will aid the court in determining the outcome of the case the record will not be reopened to admit evidence that is merely cumulative or impeaching 114_tc_276 abrogated on other grounds 132_tc_203 see 790_f2d_1450 9th cir similarly this court will weigh the diligence of and any prejudice to the parties when disposing of motions to reopen the record see estate of freedman v commissioner tcmemo_2007_61 slip op pincite see also 664_f2d_1105 9th cir citing 590_f2d_470 3d cir the raifmans’ motion challenged neither the authenticity or admissibility of the penalty approval form as a business record nor the associated declaration of ra alvarezdollar_figure additionally the raifmans do not argue that the grant of respondent’s motion would be improper in that the penalty approval form is immaterial cumulative or impeachingdollar_figure instead the raifmans appear to argue that they would be prejudiced if we admitted the penalty approval form without giving them an opportunity to cross-examine ra alvarez and mr gee to this extent the raifmans argue the penalty approval form is insufficient to establish 44as a preliminary matter we hold that the penalty approval form is admissible in that the form is an admissible business record under fed r evid see fed r evid see also 119_tc_183 by the same measure we hold that ra alvarez sufficiently identified and established her familiarity with the signature of mr gee see fed r evid b 45on the basis of this court’s holdings in graev ii and graev iii see supra note the record before us lacks any evidence upon which we may ascertain whether the commissioner complied with the written supervisory approval requirement of sec_6751 accordingly the penalty approval form is by its nature material and manifestly not cumulative as admission of the penalty approval form into evidence would stand to influence this case’s outcome by being the only record in evidence that might establish whether the commissioner actually complied with the requirement of sec_6751 whether ra alvarez or mr gee adequately considered the applicability of any reasonable_cause penalty defense available to the raifmans and that the only means of establishing such is through cross-examination sec_6751 requires only that the initial determination of the accuracy-related_penalty be personally approved in writing by the immediate supervisor of the individual who determined that the penalty is applicable we are not persuaded by the raifmans’ argument that additional cross-examination is necessary to avoid prejudice first the penalty approval form as documentary_evidence offered as part of respondent’s motion will indicate that respondent either did or did not comply with the written supervisory approval requirement of sec_6751 we again note that the raifmans’ motion and subsequent response failed to challenge the penalty approval form or its attached declaration in any respect evidentiary or otherwise absent such a prima facie challenge we are left with the conviction that admission of the penalty form would not prejudice the raifmans and that further cross-examination is unnecessary second to the extent the raifmans request the opportunity to cross-examine ra alvarez and mr gee with respect to whether they adequately contemplated the raifmans’ reasonable_cause defense we determine that such a line of questioning would be immaterial and wholly irrelevant to ascertaining whether respondent complied with the written supervisory approval requirement of sec_6751 or the merits of the raifmans’ reasonable_cause defense to accuracy-related_penalties under sec_6662 for the years at issue the written supervisory approval requirement of sec_6751 requires just that written supervisory approval we decline to read into sec_6751 the subtextual requirement advocated by the raifmans in their request for additional cross- examination similarly we believe it would be imprudent for this court to now begin examining the propriety of the commissioner’s administrative policy or procedure underlying his penalty determinations see 62_tc_324 dollar_figure thus we cannot conclude that the raifmans would be prejudiced accordingly respondent’s motion will be granted and the penalty approval form is received into evidence the raifmans’ motion will be denied recognizing the parties concessions and in the light of our holdings above and 46the rule stated by this court in 62_tc_324 predates the addition of the written supervisory approval requirement of sec_6751 to the code congress understood the longstanding rule_of greenberg’s express when it enacted sec_6751 and at that time did not deem it necessary to expand our jurisdiction or overturn our precedent as the raifmans advocate here see 434_us_575 our discussion below we hold that respondent has satisfied his burden of production b reasonable_cause justified reliance once the commissioner meets his burden the burden_of_proof is on the taxpayer to prove that the application of the penalty is inappropriate see higbee v commissioner t c pincite the raifmans argue that the accuracy- related penalties are inappropriate as they acted with reasonable_cause and in good_faith in relying on the tax_advice of mr ramos and mr shaw the accuracy-related_penalty will not apply to any portion of the underpayment for which a taxpayer establishes that he or she had reasonable_cause and acted in good_faith sec_6664 the determination of whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all the pertinent facts and circumstances including his or her efforts to assess the proper tax_liability the knowledge and experience of the taxpayer and the extent to which he or she relied on the advice of a tax professional see sec_1_6664-4 income_tax regs a taxpayer acts with reasonable_cause when he or she exercises ordinary business care and prudence with respect to a disputed tax item 115_tc_43 aff’d 299_f3d_221 3d cir good-faith reliance on the advice of an independent competent professional as to the tax treatment of an item may meet this requirement see sec_1_6664-4 income_tax regs a taxpayer acts in good_faith when he or she acts upon honest belief and with intent to perform all lawful obligations see rutter v commissioner tcmemo_2017_174 at a taxpayer alleging reasonable good-faith reliance on the advice of an independent competent professional must prove that the adviser was a competent professional who had sufficient expertise to justify reliance the taxpayer provided necessary and accurate information to the adviser and the taxpayer actually relied in good_faith on the adviser’s judgment neonatology assocs p a v commissioner t c pincite a taxpayer’s unconditional reliance on an otherwise qualified professional does not constitute reasonable reliance in good_faith for purposes of sec_6664 see 144_tc_306 a taxpayer asserting reasonable reliance must show that the opinion of a qualified adviser took into account all facts and circumstances and was not based on unreasonable facts or legal assumptions sec_1_6664-4 income_tax regs similarly a taxpayer cannot reasonably rely on the professional advice of an individual the taxpayer knows or should know to be an insider or a promoter of a particular tax scheme or to have an inherent conflict of interest 132_tc_161 aff’d 408_fedappx_908 6th cir 92_tc_958 aff’d without published opinion 921_f2d_280 9th cir first we observe that the raifmans jettisoned their former c p a after electing to engage in the classicstar and derivium programs and shortly after mr ramos had presented that c p a with materials regarding the raifmans’ participation in the classicstar program following this parting of ways the raifmans turned to mr ramos for referral to a return preparer mr ramos the individual who sold the raifmans on the transactions at issue had a professional interest in delivering the raifmans a return preparer who would respect those transactions particularly as they had not sought or secured any legal or tax_advice before engaging in them accordingly mr ramos referred the raifmans to mr shaw who they hired sight unseen second as mr shaw’s testimony and the remainder of the record illustrate mr shaw did not provide the raifmans with any actual independent and objective tax_advice mr shaw did not examine the substance of any of the transactions which the raifmans had hired him to report on indeed mr shaw’s engagement with the raifmans expressly limited the scope of his responsibilities any independent advice that mr shaw may have rendered was not based on his own review of all pertinent facts and circumstances mr shaw instead closely coordinated with mr ramos and other promoters in his preparation and defense of the raifmans’ returns for the years at issue and assumed the veracity of the factual and legal representations of those individualsdollar_figure additionally we observe that the raifmans are sophisticated individuals whose experience and savvy ought to have clued them in early on to the reality that the tax benefits touted by the derivium and classicstar programs were too good to be true with respect to the derivium transaction the raifmans directed mr ramos to review the program with an outside adviser a licensed c p a and attorney an attorney who declined to engage in any such review undaunted the raifmans sought no further expertise consulted no other professionals and engaged in a series of derivium transactions despite their own misgivings more egregiously the raifmans sought no outside counsel with respect to the tax benefits of the classicstar program before choosing to participate in the program 47with respect to the raifmans’ originally claimed deduction for a dollar_figure million theft_loss for tax_year mr shaw testified without elaboration that he determined this deduction would be proper pursuant to the arbitration decision we observe that mr shaw’s determination in this regard similarly relies on unreasonable assumptions with respect to the deduction claimed or completely disregards rules and regulations which proscribe deductions for theft losses until no reasonable_prospect_of_recovery exists to this extent the raifmans’ assertion of reliance on the advice of mr shaw is again unreasonable as their actions reveal a lack of reasonable business care and prudence on their part see neonatology associates p a v commissioner f 3d pincite when as here a taxpayer is presented with what would appear to be a fabulous opportunity to avoid tax obligations he should recognize that he proceeds at his own peril new phoenix sunrise corp v commissioner t c pincite on the record before us any objective and independent advice the raifmans may have received did not come from mr shaw the raifmans engaged mr shaw as a strictly prophylactic measure to the extent mr shaw rendered any advice the raifmans either knew or should have known that such advice was moored to the representations of mr ramos and others riddled with conflicts stemming from their roles as promoters and insiders of the transactions at issue thus any reliance on mr shaw is objectively unreasonable accordingly we sustain respondent’s determination that petitioners are liable for accuracy-related_penalties for the years at issue consistent with our holdings above to reflect the foregoing an appropriate order will be issued and decision will be entered under rule


internal_revenue_service number release date index number - --------------- -------------------------- ---------------------------------- -------------------------------- - department of the treasury washington dc person to contact ------------------- id no ------------- telephone number --------------------- refer reply to cc psi b01 - plr-165174-03 date feb --------------------------------------- ---------------------------------------------- x y date legend ------------------------------------------------------------ ------------------------------------------------------------ dear -------------- date ---------------------------- --------------------- ------------ country state ------------------------- this private_letter_ruling is in response to your request dated date on behalf of x requesting an extension of time under sec_301_9100-3 of the procedure and administration regulations to file an election to be disregarded as an entity separate from its owner for federal tax purposes under sec_301_7701-3 facts based on the information submitted and representations made within x is a plr-165174-03 country entity formed on date x represents that as of date x was eligible to make an election under sec_301_7701-3 to be disregarded as an entity separate from its owner for federal income purposes however the form_8832 entity classification election was inadvertently not timely filed x is one of several foreign entities that is indirectly owned by y a state law limited_partnership law and analysis under sec_301_9100-1 the commissioner may grant a reasonable sec_301_7701-3 provides guidance on the classification of a foreign eligible_entity for federal tax purposes generally a foreign eligible_entity is treated as an association_taxable_as_a_corporation if all members have limited_liability unless the entity makes an election to be treated otherwise if a foreign eligible_entity has one owner it may elect to be treated as a disregarded_entity pursuant to the rules in sec_301_7701-3 if a foreign eligible_entity has more than one owner it may elect to be treated as a partnership pursuant to the rules in sec_301_7701-3 sec_301_7701-3 provides that an entity classification election must be filed on form_8832 and can be effective up to days prior to the date the form is filed or up to months after the date on which the form is filed extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the code except subtitles e g h and i sec_301_9100-1 defines the term regulatory election as including an election whose deadline is prescribed by a regulation published in the internal_revenue_bulletin commissioner will use to determine whether to grant an extension of time to make an election sec_301_9100-1 elections sec_301_9100-3 provides extensions for time for making elections that do not meet the requirements of sec_301_9100-2 provides evidence to establish that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301 a requests for relief under sec_301_9100-3 will be granted when the taxpayer sec_301_9100-2 provides automatic extensions of time for making certain sec_301_9100-1 through provide the standards the conclusion based solely on the facts submitted and representations made we conclude that the requirements of sec_301_9100-3 have been satisfied accordingly x is granted except as expressly provided herein no opinion is expressed or implied plr-165174-03 an extension of time of sixty days from the date of this letter to elect to be disregarded as an entity separate from its owner for federal tax purposes effective date the election should be made by filing form_8832 with the appropriate service_center a copy of this letter should be attached to the election concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the internal_revenue_code provides that it may not be used or cited as precedent letter will be sent to the taxpayer this ruling is directed only to the taxpayer s requesting it sec_6110 of in accordance with the power_of_attorney on file with this office a copy of this sincerely heather c maloy associate chief_counsel passthroughs special industries copy of this letter copy for sec_6110 purposes enclosures cc