t c no united_states tax_court new phoenix sunrise corporation and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date p is the parent of a consolidated_group of corporations and a wholly owned subsidiary s during s sold substantially_all of its assets realizing a gain of about dollar_figure million also during s entered into a transaction whereby s purchased from and sold to a foreign bank respectively a long and a short option in foreign_currency paying only the net premium to the foreign bank s and w a part owner of p formed partnership o and s contributed the long and short options to o increasing its basis in o by the amount of the premium on the purchased long option but not reducing its basis by the amount of the premium on the sold short option the long and short options expired worthless shortly thereafter the partnership dissolved and distributed shares of stock in cisco systems inc to s in redemption of its partnership_interest s sold the stock for a small economic loss on its consolidated_return p claimed a loss of about dollar_figure million on s’ sale of the stock p calculated the amount of the loss by claiming an inflated basis of about dollar_figure million in the cisco systems inc stock distributed by o the claimed dollar_figure million loss was used to offset the dollar_figure million gain on the sale of s’ assets o filed an information_return showing a loss on the expiration of the long and short options and allocating that loss to s and w because o qualified as a small_partnership under sec_6231 i r c the unified_audit and litigation procedures of the tax equity and fiscal responsibility act of publaw_97_248 96_stat_648 do not apply r issued a notice_of_deficiency to s and p petitioned upon a consolidated_return which included s the notice_of_deficiency disallowed the claimed loss on the sale of the stock the claimed flowthrough loss from o and claimed deductions for legal fees the notice was based in part on r’s belief that the transaction entered into by p lacked economic_substance and should be disregarded for federal tax purposes the notice also imposed the penalty under sec_6662 i r c held the transaction s entered into lacked economic_substance and is disregarded held further the legal fees are not deductible by p held further s is liable for sec_6662 i r c penalty john p tyler anthony j rollins and willard n timm for petitioner r scott shieldes and kathryn f patterson for respondent goeke judge respondent determined a deficiency of dollar_figure in petitioner’s federal_income_tax for and imposed a penalty under sec_6662 of dollar_figure for the 1unless otherwise indicated all section references are to the internal_revenue_code code reasons stated herein we uphold the determinations in the notice_of_deficiency and find the sec_6662 penalty applicable findings_of_fact some of the facts have been stipulated and the stipulations of fact and the accompanying exhibits are incorporated herein by this reference on date the pruett-wray cattle co was incorporated pursuant to the laws of the state of arizona in it changed its name to new phoenix sunrise corp new phoenix mr wray timothy wray mr wray became president and ceo of new phoenix in mr wray graduated from princeton university with a bachelor of arts degree and then obtained a master’s degree in business administration from stanford university mr wray was a member of the u s rowing team from through after graduating from college but while still a member of the rowing team mr wray worked for vanguard a securities firm after retiring from rowing mr wray began to examine the family business new phoenix at that time new phoenix was managed by nonfamily members and experiencing financial difficulties mr wray worked to refinance the company’s debt by securing a new lender and as part of the arrangement took over as president and ceo until new phoenix’s dissolution in in addition to serving as new phoenix’s president and ceo mr wray worked from until as a research analyst for questor management co a private equity firm capital poly bag capital poly bag inc capital was incorporated in under the laws of the state of ohio capital manufactured plastic bags for sale to large institutions and had manufacturing facilities in columbus ohio and atlanta georgia new phoenix purchased the stock of capital in at all relevant times thereafter capital was a subsidiary of new phoenix and filed consolidated income_tax returns with the new phoenix group of corporations elsea collins co elsea collins co elsea collins was an accounting firm in columbus ohio elsea collins provided financial_accounting and performed state and local_tax work for capital starting in the 1980s during and james hunter mr hunter was a c p a and a partner at elsea collins bricker eckler l l p bricker eckler l l p bricker eckler is a law firm based in columbus ohio bricker eckler provided legal services for capital from the 1970s until the company’s dissolution during and gordon f litt mr litt was an attorney and a partner at bricker eckler joseph w roskos co in and joseph w roskos co roskos co was a subsidiary of bryn mawr bank corp in bryn mawr pennsylvania roskos co provided office services including accounting consulting tax services and fiduciary support for high-net- worth individuals elsea collins prepared new phoenix’s financial statements upon which roskos co relied in providing services to new phoenix in and robert m fedoris mr fedoris was roskos co ’s president and andrew king mr king was an employee mr fedoris prepared new phoenix’s consolidated form_1120 u s_corporation income_tax return as well as form_1065 u s return of partnership income for olentangy partners discussed below jenkins gilchrist during and jenkens gilchrist p c jenkens gilchrist was a law firm based in dallas texas with offices in chicago houston austin san antonio los angeles and washington d c sale of capital in date negotiations commenced regarding the sale of substantially_all of capital’s assets to pitt plastics inc an unrelated third party the asset sale at the time capital was the only operating company within the new phoenix consolidated_group of corporations on date the shareholders of new phoenix approved the sale of substantially_all of capital’s assets to pitt plastics inc on date the asset sale was consummated capital sold substantially_all of its assets to pitt plastics inc for dollar_figure mr litt represented new phoenix in connection with the asset sale and also advised new phoenix regarding the tax consequences of the asset sale and the contemplated liquidation of the new phoenix group after the asset sale mr wray became capital’s president treasurer and sole director capital realized a gain of dollar_figure from the asset sale after the asset sale capital’s only real asset consisted of approximately dollar_figure million in cash in date new phoenix estimated that its gain from the asset sale was approximately dollar_figure million mr wray meets attorneys of jenkens gilchrist in the fall of mr litt introduced mr wray to paul daugerdas mr daugerdas and john beery mr beery of jenkens gilchrist messrs daugerdas and beery were promoting a tax strategy called basis leveraged investment swap spread the bliss transaction or the transaction at issue a one-page executive summary of the bliss transaction provided the following steps taxpayer through a single-member limited_liability_company treated as a disregarded_entity for tax purposes enters into two swaps notional_principal_contracts paying an upfront payment yield adjustment fee to acquire one swap and receiving an upfront payment with respect to the other such transaction is a nontaxable event notwithstanding the receipt of cash proceeds as an upfront payment however such amount and the amount_paid for the other swap must be amortized into income and expense over the life of the swap a business and or investment reason for this investment strategy must exist eg the position should hedge an investment or currency prices will increase or decrease etc taxpayer and another partner or his wholly owned s_corporation s corp form a partnership or limited_liability_company designed to be taxed as a partnership referred to herein as partnership in which taxpayer is partner and s corp or other party is a partner taxpayer contributes the purchased swap entered into to the partnership together with the short swap this contribution should result in taxpayer’s tax basis in his partnership or membership interest being equal to the cost of the swap contributed the short swap is more_likely_than_not not treated as a liability for tax purposes achieving this result throughout the duration of the swap the partnership makes or receives payments pursuant to the swap terms and conditions and recognizes economic_gain_or_loss on the transaction at maturity the swap terminates partnership purchases foreign_currency or marketable_securities for investment alternatively the partnership may receive a capital_asset as a contribution from its partners taxpayer and other partner contributes his stepped-up partnership_interest to s corp this results in the partnership only having one partner and therefore it liquidates this results in a step-up in the basis of the assets formerly held by partnership to the stepped-up outside_basis of the s corp partner s corp sells the stepped-up assets generating an ordinary or capital_loss as the case may be on date mr daugerdas sent mr litt a blank information questionnaire pertaining to mr wray and capital mr litt completed the questionnaire and returned it to mr daugerdas the following day jenkens gilchrist prepared documents and correspondence used to implement the bliss transaction olentangy partners on or before date mr wray authorized jenkens gilchrist to form olentangy partners olentangy partners was organized as a general_partnership on date pursuant to the laws of the state of ohio the partnership_agreement was signed by mr wray both in his individual capacity and as president of capital the partnership_agreement identifies capital as having a 99-percent interest and mr wray as having a 1-percent interest in olentangy partners jenkens gilchrist prepared all documents related to the formation of olentangy partners and filed all documents for olentangy partners with the appropriate government agencies olentangy partners did not contemplate or engage in any activities other than the bliss transaction deutsche bank ag deutsche bank ag deutsche bank is an international bank headquartered in germany with a branch office in london england the london branch does business as deutsche bank ag london branch deutsche banc alex brown dba brown is a licensed broker-dealer engaged in the securities brokerage business in the united_states dba brown is a division of deutsche bank subsidiaries inc and deutsche bank alex brown l l c which are indirect subsidiaries of deutsche bank options in general an option is a contract that gives the buyer the right but not the obligation to buy or sell an asset at a predetermined price the strike_price in exchange for selling an option the seller receives from the purchaser a premium which reflects the value of the option the risk to a purchaser of an option is limited to the premium the risk to the seller of an option can be unlimited it is the difference between the strike_price and the market price of the asset at expiration less the premium a european option is one that can be exercised only on its expiration date a digital option is one in which the payout is a fixed amount agreed to by the buyer and the seller at the time of the option’s inception an option to purchase property such as foreign_currency is in the money if at expiration the strike_price is at or below the price at which the referenced currency is trading in the foreign_currency market the spot_rate an option to purchase such property is out of the money if at expiration the strike_price is above the spot_rate a european digital option on foreign_currency typically expires pincite a m new york time on the termination_date referenced in the option contract the buyer of a european digital option on foreign_currency typically pays an upfront premium in exchange for a predetermined payout if the option is in the money this premium is typically expressed as a percentage of the payout and delineates the odds that the option will be in the money at the time of expiration an option spread trade involves the simultaneous purchase and sale of linked options the purchase of one option is either partially or completely financed by the sale of another option at a different strike_price an option spread trade limits the gain the purchaser can realize on the options because the option sold puts a ceiling on the total profit similarly the seller of the option spread has limited its potential loss to the amount of the spread purchaser’s potential gain the digital option spread on or about date mr wray simultaneously opened two separate brokerage accounts with dba brown--one on behalf of olentangy partners the olentangy partners account and the other on behalf of capital the capital_account capital purchased a digital option spread on the u s dollar japanese yen usd jpy exchange rate from dba brown on date dba brown sent mr berry letter agreements between capital and deutsche bank ag london branch for use in the transaction the letter agreements included incorrect notional amounts on date dba brown issued corrected letter agreements identifying each as a digital swap transaction and describing purported transactions entered into between deutsche bank ag london branch and capital the letter agreements letter agreement odet the long contract and letter agreement odet the short contract were dated date identified the trade_date as date and had a corrected notional amount of dollar_figure million deutsche bank gave mr wray a choice of one of three currencies to use for the digital option spread the japanese yen the british pound or the euro mr wray chose the japanese yen the long contract required capital to pay a premium of dollar_figure on date and two other fixed payments of dollar_figure million each the first on date and the second on date in exchange the long contract called for deutsche bank ag london branch to make the following contingent payments dollar_figure on date but only if the spot_rate on the usd jpy exchange rate pincite a m on date as determined by the calculation agent was greater than or equal to and dollar_figure on date but only if the spot_rate pincite a m on date as determined by the calculation agent was greater than or equal to the short contract called for deutsche bank ag london branch to pay a premium of dollar_figure on date and two other fixed payments of dollar_figure each one on date and the other on date in exchange the short contract called for capital to make the following contingent payments dollar_figure on date but only if the spot_rate pincite a m on date as determined by the calculation agent was greater than or equal to and dollar_figure on date but only if the spot_rate pincite a m on date as determined by the calculation agent was greater than or equal to capital and deutsche bank did not pay the full amounts of their respective premiums under the digital option spread instead capital paid the net difference of dollar_figure the dollar_figure premium on the long contract minus the dollar_figure premium on the short contract on date the short contract’s strike prices dollar_figure and exceeded the long contract’s strike prices dollar_figure and by only pips a pip is one ten-thousandth of a quoted price in foreign exchange in usd jpy terms a pip is worth 2after capital paid deutsche bank dollar_figure deutsche bank returned dollar_figure leaving capital at risk for the remaining dollar_figure dollar_figure08 both contracts listed deutsche bank as the calculation agent as discussed more fully below deutsche bank’s role as calculation agent limited the profit potential of the transaction on date jenkens gilchrist forwarded to mr wray the remaining documents necessary to implement the bliss transaction the package consisted of letter agreements memorializing the digital option spread an agreement assigning the digital option spread to olentangy partners an agreement liquidating olentangy partners and correspondence authorizing dba brown to transfer the digital option spread to olentangy partners to purchase and sell securities and to make certain deposits to and withdrawals from the capital and olentangy partners accounts many of the documents were not dated and jenkens gilchrist advised mr wray not to date the documents on date the digital option spread expired worthless on date mr wray signed and returned the above-referenced documents to jenkens gilchrist mr wray also sent copies to mr litt that same day jenkens gilchrist forwarded to dba brown the assignment agreement and the letter signed by mr wray authorizing the assignment of the digital option spread to olentangy partners the assignment agreement and the letter were both dated date they were among the documents that mr wray signed on date but was told not to date pursuant to the assignment agreement and mr wray’s letter dba brown transferred the digital option spread from the capital_account to the olentangy partners account in contributing the digital option spread to olentangy partners capital stepped up its outside_basis in olentangy partners by the amount of the long position’s premium but did not reduce its outside_basis by the amount of the transferred short position’s premium on date dba brown transferred the amount of dollar_figure from the capital_account to the olentangy partners account as a capital_contribution also on that same day olentangy partners purchased big_number shares of cisco systems inc stock for dollar_figure the cisco stock pursuant to the liquidation agreement signed by mr wray olentangy partners was liquidated effective date and as of that date dba brown liquidated the olentangy partners account and transferred the cisco stock and dollar_figure from that account to the capital_account on date capital sold the big_number shares of the cisco stock for dollar_figure realizing an economic loss of dollar_figure from the sale the irs response to alleged abusive tax_shelters on date the department of the treasury treasury_department issued temporary regulations requiring corporate taxpayers to disclose listed and other reportable_transactions sec_301_6111-2t temporary income_tax regs fed reg date notice_2000_44 2000_2_cb_255 was issued on date and published in the internal_revenue_bulletin on date notice_2000_44 2000_36_irb_255 the notice warned taxpayers of transactions calling for the simultaneous purchase and sale of offsetting options which were then transferred to a partnership the notice determined that the purported losses from such offsetting option transactions did not represent bona_fide losses reflecting actual economic consequences and that the purported losses were not allowable for federal tax purposes see 80_fedclaims_11 reporting of the transaction on date mr hunter calculated capital’s gain from the asset sale of the total he attributed dollar_figure to ordinary gain and dollar_figure to capital_gain on date mr litt emailed mr daugerdas to inform him that he felt incapable of advising new phoenix’s accountants regarding the proper reporting of the bliss transaction mr litt anticipated questions from roskos co concerning whether the bliss transaction had to be reported as a listed_transaction or as a confidential_corporate_tax_shelter on date mr litt emailed mr wray attaching a copy of a news article about the treasury department’s action regarding abusive tax_shelters in the email mr litt suggests that in view of the news article and possible treasury_department action it was important to prepare and file the new phoenix tax returns as soon as possible the treasury_department amended its temporary regulations regarding disclosure requirements effective date to include noncorporate taxpayers who directly or indirectly entered into listed transactions on or after date fed reg date on date mr litt and mr daugerdas spoke and they discussed the date treasury_department amendments as well as the sec_6662 accuracy-related_penalty mr daugerdas indicated that the date amendments applied to the bliss transaction and that not disclosing it was an aggressive position to take on date jenkens gilchrist issued a written tax opinion to capital concerning treatment of the bliss transaction the opinion concluded that capital would more_likely_than_not prevail if the internal_revenue_service irs challenged capital’s federal_income_tax reporting of the bliss transactions mr wray instructed new phoenix’s advisers and return preparers to prepare new phoenix’s federal_income_tax returns in accordance with the jenkens gilchrist opinion letter on date mr litt discussed the date amendments with mr wray and informed him that not disclosing the bliss transaction was an aggressive position requiring approval of new phoenix’s tax_return_preparer on date mr wray sent mr litt an email indicating his intention of taking as aggressive a position as possible in filing the return on date mr daugerdas and mr litt discussed the possibility that the bliss transaction was substantially_similar to those transactions discussed in notice_2000_44 supra the sec_6662 accuracy-related_penalty and the potential of being audited if new phoenix disclosed the bliss transaction on date roskos co sent draft copies of federal tax returns for for capital and new phoenix to mr daugerdas and mr hunter a letter enclosed with the drafts indicated that mr wray wanted to file the returns as soon as possible in view of the new regulations a second set of draft returns was sent on date the second set included two different versions of capital’s schedules m-1 reconciliation of income loss per books with income per return and schedules m-2 analysis of unappropriated retained earnings per books and attached statements the difference between the two versions was in how the bliss transaction was reported the first version included a schedule m-1 adjustment on line deductions on this return not charged against book income this year of dollar_figure to show the book to tax difference of the sale of the cisco stock the second version did not include any adjustment regarding the sale of the cisco stock on date new phoenix filed a consolidated form_1120 for the taxable_year ending date the form_1120 was signed on behalf of new phoenix by mr wray as president and mr fedoris as paid tax_return_preparer the return reported a federal_income_tax liability of dollar_figure new phoenix reported a net_capital_gain of dollar_figure and an ordinary gain of dollar_figure from the asset sale on schedule d capital_gains_and_losses new phoenix reported a dollar_figure loss on the sale of the cisco stock by capital to arrive at this amount new phoenix reported a sale price of dollar_figure and an adjusted_basis in the cisco stock of dollar_figure new phoenix derived this adjusted_basis from capital’s stepped-up_basis in olentangy partners less cash distributions new phoenix also reported dollar_figure as capital’s distributive_share of loss from olentangy partners and claimed a deduction of dollar_figure for payments to jenkens gilchrist the new phoenix consolidated_return schedule m-1 did not include an adjustment to account for the difference between book and tax treatment of the sale of the cisco stock the attached statement showing schedule m-1 adjustments for new phoenix subsidiaries also did not contain a schedule m-1 adjustment for capital to account for the difference in treatment on or about date olentangy partners filed an information_return reporting a loss of dollar_figure from the digital option spread’s expiring worthless of this loss olentangy partners reported capital’s distributive_share as dollar_figure and mr wray’s distributive_share as dollar_figure on capital’s schedule_k-1 partner’s share of income credits deductions etc olentangy partners reported capital contributions of dollar_figure and distributions of dollar_figure on mr wray’s schedule_k-1 olentangy partners reported capital contributions of dollar_figure and distributions of dollar_figure on or about date mr wray filed his federal_income_tax return for tax_year in reporting the bliss transaction for federal_income_tax purposes new phoenix and its officers and advisers relied solely on the advice of jenkens gilchrist on date respondent issued a timely notice_of_deficiency the notice to petitioner the notice determined a 3the unified_audit and litigation procedures of the tax equity and fiscal responsibility act of tefra pub l continued deficiency in income_tax of dollar_figure and imposed a penalty of dollar_figure pursuant to sec_6662 attached to the notice was an explanation of items which provided various grounds for the disallowance of the claimed dollar_figure loss on the sale of the cisco stock and for the imposition of the sec_6662 penalty on date a petition was filed on behalf of new phoenix a trial was held on january and during the court’s atlanta georgia session petitioner produced three fact witnesses and one expert witness respondent produced two expert witnesses pursuant to sec_7482 the parties stipulated that the decision in this case will be appealable to the court_of_appeals for the sixth circuit i introduction opinion respondent makes arguments in support of the notice_of_deficiency including that the digital option spread is a sham lacking economic_substance that olentangy partners was a sham and should be ignored for federal_income_tax purposes and should we find economic_substance in the digital option spread continued sec_401 96_stat_648 do not apply to olentangy partners olentangy partners qualifies as a small_partnership under sec_6231 and did not elect pursuant to sec_6231 to have tefra apply see wadsworth v commissioner tcmemo_2007_46 the small_partnership_exception permits this court to review in a deficiency_suit items that otherwise would be subject_to partnership-level proceedings and respect olentangy partners as a partnership that petitioner treated the digital option spread incorrectly on its return separately respondent argues that because the transaction lacks economic_substance new phoenix is not entitled to deduct the dollar_figure paid to jenkens gilchrist lastly respondent argues that should we uphold his determinations new phoenix is liable for an accuracy-related_penalty based upon the resulting underpayment the notice determined a variety of sec_6662 penalties respondent argues that a sec_6662 40-percent gross valuation penalty applies because new phoenix made a gross_valuation_misstatement by overstating its basis in the cisco stock should we find that new phoenix did not make a gross_valuation_misstatement respondent argues that a 20-percent penalty should be imposed because new phoenix made a substantial_understatement_of_income_tax on its return and acted negligently by disregarding notice_2000_44 supra anticipating petitioner’s claimed reasonable_cause and good_faith defense respondent argues that new phoenix was not reasonable in relying on the jenkens gilchrist opinion letter because it was issued by a promoter of the transaction ii burden_of_proof in general the burden_of_proof with regard to factual matters rests with the taxpayer under sec_7491 if the taxpayer produces credible_evidence with respect to any factual issue relevant to ascertaining the taxpayer’s liability and meets other requirements the burden_of_proof shifts from the taxpayer to the commissioner as to that factual issue because we decide this case on the basis of the preponderance_of_the_evidence we need not decide upon which party the burden rests iii sham_transaction doctrine as stated above the parties have stipulated that an appeal in this case would lie in the court_of_appeals for the sixth circuit pursuant to 54_tc_742 affd 445_f2d_985 10th cir we follow the law of that court_of_appeals as it applies to this case the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits cannot be doubted 293_us_465 however even if a transaction is in formal compliance with code provisions a deduction will be disallowed if the transaction is an economic sham am elec power co v united_states 326_f3d_737 6th cir the court_of_appeals for the sixth circuit has stated that ‘the proper standard in determining if a transaction is a sham is whether the transaction has any practicable economic effects other than the creation of income_tax losses ’ 435_f3d_594 6th cir quoting 868_f2d_851 6th cir affg 88_tc_386 if the transaction has economic_substance ‘the question becomes whether the taxpayer was motivated by profit to participate in the transaction ’ id quoting 982_f2d_163 6th cir affg t c memo ‘if however the court determines that the transaction is a sham the entire transaction is disallowed for federal tax purposes’ id and no subjective inquiry into the taxpayer’s motivation is made id a court will not inquire into whether a transaction’s primary objective was for the production_of_income or to make a profit until it determines that the transaction is bona_fide and not a sham rose v commissioner supra pincite accordingly we must first determine whether the bliss transaction had any practical economic_effect dow chem co v united_states supra pincite the presence or lack of economic_substance for federal tax purposes is determined by a fact- specific inquiry on a case-by-case basis 435_us_561 if we find that the bliss transaction did in fact have a practical economic_effect we will then look to mr wray’s and new phoenix’s motives in entering into the transaction at issue iv economic_effect a respondent’s arguments respondent argues that the transaction lacked economic_substance and should therefore be disregarded respondent premises this argument on two factors that the digital option spread had no practical economic_effect and that the transaction served no business_purpose and was developed as a tax_avoidance mechanism and not an investment strategy practical economic_effect respondent argues that a prudent investor would not have engaged in the digital option spread because there was no reasonable possibility after taking into account transaction costs of making a profit respondent contends that capital paid deutsche bank a net amount of dollar_figure in exchange for four possible outcomes if the contracts were out of the money on both expiration dates capital would lose its dollar_figure net investment if the contracts were in the money on only one expiration date capital would break even if the contracts were in the money on both expiration dates capital would earn a maximum net profit of dollar_figure if the long contract was in the money and the short contract was out of the money on one or both of the two expiration dates capital could earn either dollar_figure million or dollar_figure million referred to as hitting the sweet spot although it appears that respondent is conceding economic_substance on the basis of the third and fourth possible outcomes respondent argues that any profits in scenario were dwarfed by the transactions fees while hitting the sweet spot was not possible concerning the third possible outcome respondent argues that although a profit potential existed if both contracts expired in the money it would not be a true economic profit because the fees capital paid to enter into the transaction including fees paid to deutsche bank and the dollar_figure paid to jenkens gilchrist would exceed any amount capital earned regarding the fourth possible outcome respondent relies on expert testimony concerning two factors that in his view prevent capital from ever hitting the sweet spot respondent produced two expert witnesses--steven pomerantz dr pomerantz and thomas p murphy mr murphy dr pomerantz holds a ph d in mathematics from the university of california at berkeley and has taught classes in statistics probability operations research and finance at both the undergraduate and graduate level dr pomerantz has also worked in the investment community for more than years holding positions in research and management for fixed income equities derivatives and alternative investments at several major firms mr murphy received a b a in psychology and economics from the university of pennsylvania and an m b a in finance and accounting from columbia business school mr murphy has worked in the foreign exchange markets for about years as a market maker providing quotes to customers a buy-side user seeking quotes from market makers and as a manager of both the crux of respondent’s argument is that although there was a very small theoretical possibility of hitting the sweet spot the structure of the transaction and industry practice lowered that theoretical possibility to zero dr pomerantz testified about the probabilities of the following outcomes there was a 8-percent chance that neither option would pay and capital would lose its dollar_figure investment there was a 4-percent chance that one option would pay and capital would break even there was a percent chance that both options would pay earning capital a dollar_figure profit and there was a 2-percent chance that capital would hit at least one sweet spot earning at least dollar_figure million dr pomerantz further testified that taking into account the costs associated with entering into the bliss transaction capital would lose money in the first three scenarios mr murphy also testified about capital’s chances of hitting either sweet spot mr murphy testified that the probability of the long option’s hitting the sweet spot was percent and the probability of the short option’s hitting the sweet spot was percent mr murphy also testified that during his currency trading career he had never entered into a spread trade where the strike prices were so narrow respondent argues further that even if we find the small percentage chance of hitting the sweet spot to be sufficient to satisfy the first prong of dow chemical the digital option spread and accordingly the bliss transaction ultimately lacked economic_substance because deutsche bank could in effect prevent hitting the sweet spot either by virtue of its being the calculation agent or by taking advantage of its large trading position to move the market and the strike_price itself mr murphy testified that pursuant to industry practice hitting the sweet spot was impossible mr murphy’s conclusion centered on deutsche bank’s role as calculation agent which made this result impossible mr murphy’s expert report defined the calculation agent as the entity normally the seller of the digital option structure that determined whether the payout event occurred at expiration on the termination_date mr murphy explained that to make this determination in the calculation agent would contact four other banks for a spot price the other banks would then provide a range within which they would be willing to buy and sell the particular currency pair mr murphy testified that in industry practice was such that the counterparty banks contacted always gave a spread that was at least pips wide mr murphy further explained that the calculation agent would then choose any rate within the range provided by the four banks in mr murphy’s view hitting the sweet spot was impossible because deutsche bank was the calculation agent for the digital option spread and facing the prospects of making a large payout to capital if the sweet spot was hit could simply choose a rate from those provided by the four other banks that was most beneficial to deutsche bank respondent relying on mr murphy’s testimony argues that hitting the sweet spot was impossible because the option spreads were pips wide and the market spread wa sec_3 pips wide in accordance with industry practice respondent contends that deutsche bank would never use the sweet spot as the calculation rate thereby allowing itself to avoid making the large payments required mr murphy provided the following example in his report example on the day of expiration pincite am the spot fx market is trading around the strike prices of the usd jpy option cpd is long usd jpy digital call with a strike_price at dollar_figure and short a usd jpy digital call with a strike_price pincite db call sec_4 banks for prices in usd jpy and receives the following quotes bank a usd jpy dollar_figure - dollar_figure i ii bank b usd jpy dollar_figure - dollar_figure iii bank c usd jpy dollar_figure - dollar_figure iv bank d usd jpy dollar_figure - dollar_figure db has complete discretion as to where the am rate should be db can determine that all the options are out of the money by setting the rate pincite dollar_figure or dollar_figure and no payout is made alternatively and less likely db could set the calculation rate at dollar_figure or dollar_figure and thus both options would have paid out for a small profit to cpb the sweet spot would have occurred only if the fixing were either dollar_figure or dollar_figure and db would have complete discretion not to set it at those rates this shows that there was no way the sweet spot was going to be paid out in addition to the above arguments respondent argues that deutsche bank on account of its ability to make large-volume trades would be able to manipulate the market in such a way as to make sure that the sweet spot was unattainable lack of business_purpose in addition to the digital option spread’s alleged inherent lack of profitability respondent argues that the bliss transaction served no business_purpose because it was developed as a tax_avoidance mechanism and not as an investment strategy respondent contends that the true purpose behind capital’s entering into the bliss transaction was to reduce the consolidated_tax_liability of the new phoenix group of corporations respondent points to memorandums produced by mr wray and sent to new phoenix shareholders documents related to the promotion and implementation of the transaction and deutsche bank’s control_over the terms of the contracts respondent points to memorandums prepared by mr wray and sent to new phoenix shareholders on july and date to support respondent’s contention that the transaction was entered into for tax_avoidance purposes the date memorandum states in part that new phoenix planned to take steps to reduce the potential tax burden by approximately dollar_figure million the date memorandum states in part new phoenix has determined subject_to receipt of written confirmation of such opinion of tax counsel to take an aggressive tax position which will permit a significantly greater proceeds amount from the sale of cpb to be distributed to the shareholders respondent also points to deutsche bank’s control_over the terms of the digital option spread contracts including setting the possible currencies the strike prices the expiration dates and the premiums respondent argues that deutsche bank’s limiting of capital’s potential profit and its own risk shows the fictional character of the bliss transaction lastly respondent argues that the assignment of the options to olentangy partners is evidence of the tax_avoidance nature of the transaction because there was no reason to contribute the options other than to claim tax benefits b petitioner’s argument sec_1 economic_effect petitioner argues that the digital option spread and the bliss transaction did in fact have economic_effect petitioner argues that similar trades were done for purely economic reasons outside of the potential tax benefits present in the instant case petitioner points to testimony by its expert witness scott hakala ph d dr hakala in support of its argument dr hakala earned a ph d in economics focusing on monetary and financial theory and international finance from the university of minnesota in from to dr hakala taught courses in international finance at both the undergraduate and master’s level at southern methodist university for the past years dr hakala has served as a consultant on international finance dr hakala concluded that the commercial terms of the digital option spread were priced consistently with market conditions and prices and the digital option spread provided a prospect of economic gain for capital dr hakala’s conclusions were based on extensive study of market conditions trends and pricing of the usd jpy exchange rate for the year before the trade_date dr hakala testified that this data supported mr wray’s belief that the u s dollar would increase in value relative to the japanese yen petitioner disputes respondent’s contention that deutsche bank had total control_over the outcome of the digital option spread and would never allow capital to profit because deutsche bank could manipulate the spot_rate or manipulate the market to affect the spot_rate disputing respondent’s expert testimony concerning industry practices in petitioner contends that the spot_rate was determined by the federal reserve board and could not be altered by deutsche bank as respondent argues petitioner contends that the confirmation documents and all included terms are governed by the international swaps and derivatives association inc isda and assorted isda documents and policies petitioner further contends that deutsche bank had neither the motivation nor the ability to manipulate the market petitioner argues that deutsche bank simply served as a broker- dealer in this transaction and acting in accordance with standard broker-dealer practice would enter into an offsetting transaction to the digital option spread this offsetting transaction petitioner argues would remove any risk to deutsche bank and any conflict of interest that would cause deutsche bank to selectively choose the market rate petitioner also points to the size of the foreign exchange market as proof of deutsche bank’s inability to manipulate the market by virtue of its large trading position arguing that deutsche bank would not attempt to make large trades in order to move the market because that would open deutsche bank to risk on other contracts with other parties lack of business_purpose petitioner disputes respondent’s contention that the digital option spreads were assigned to olentangy partners simply to produce tax benefits petitioner argues that the digital option spread was transferred to olentangy partners in order to compensate mr wray mr wray testified that over the course of his time with new phoenix he was not compensated on a day-to-day basis but instead would receive equity in new phoenix according to the type of work he did for the company mr wray further testified that because he was not compensated on a day-to-day basis he would not be able to share any profits that new phoenix received on account of the bliss transaction mr wray stated that transferring the digital option spreads to olentangy partners would allow him as a partner in the partnership to receive a share of any profits in a way that his normal compensation from new phoenix would not c conclusion we agree with respondent that the bliss transaction lacks economic_substance and fails the first prong of 435_f3d_594 6th cir economic loss we note at the outset that neither mr wray new phoenix nor capital actually suffered a dollar_figure million economic loss during the loss claimed as a result of the stepped-up_basis in the cisco stock was purely fictional although capital purchased and sold the long option to deutsche bank for a premium it paid only the difference between the long and short options see jade trading llc v united_states fed cl pincite maguire partners-master invs llc v united_states aftr 2d ustc par big_number at big_number c d cal first the claimed basis is fictional because the taxpayers paid only dollar_figure million and dollar_figure but gained an increased basis of dollar_figure and dollar_figure respectively see also 527_f3d_443 5th cir the trust acknowledges that it only suffered a dollar_figure economic loss in connection with these transactions yet it claimed a dollar_figure million tax loss on its return 515_f3d_749 7th cir 472_fsupp2d_885 e d tex deutsche bank controlled the market rate petitioner points to mr wray’s testimony concerning his background and research into currency markets before entering into the bliss transaction as evidence that a reasonable investor would enter into this type of transaction while we do not discount and respondent does not disregard mr wray’s education and experience in the field of finance documents prepared by jenkens gilchrist to promote the bliss transaction cast doubt on mr wray’s proffered reasons for entering into the transaction the one-page executive summary discussed above provided in part that a business and or investment reason for this investment strategy must exist eg the position should hedge an investment or currency prices will increase or decrease etc mr wray’s testimony that he decided to enter into the transaction after researching currency markets served only as an attempt to make an illegitimate transaction appear to have a legitimate basis respondent’s experts credibly testified that on the basis of industry practice the bliss transaction had no realistic probability of earning a profit as respondent argues the documents memorializing the digital option spread list deutsche bank as the calculation agent although petitioner argues that deutsche bank would not intentionally choose a market rate to avoid making a payment it is important to note that the contracts specifically state that neither party owes a fiduciary duty to the other because deutsche bank acted as calculation agent and because the strike_price of the options was only pips deutsche bank would always be able to choose a market rate outside that range capital never had a true opportunity to earn a profit because deutsche bank would never let that happen to do so would be to voluntarily make itself liable for payments of more than dollar_figure million see 82_fedclaims_636 the digital option spread was a closed transaction and olentangy partners soon disappeared there could be no chance of future profits much less future profits consistent with the taxpayer’s actual past conduct dow chem co v united_states supra pincite n a prudent investor would not have entered into the bliss transaction contribution to partnership respondent argues that capital and mr wray’s formation of olentangy partners was necessary so that capital could assign its inflated interest in olentangy partners to another asset--the cisco stock respondent further contends that this was done for one reason to claim a noneconomic tax loss of more than dollar_figure million when that stock was finally sold respondent concludes by arguing that this lends support to his argument that the bliss transaction lacked economic_substance petitioner argues that the digital option spread was contributed to olentangy partners in order to allow mr wray to participate in any profits that might be earned mr wray also testified that the digital option spread was contributed in order to allow him to take part in any profits earned by the transaction we do not find mr wray credible on this point the contribution of the options to olentangy partners was required in order to claim the tax benefits of the bliss transaction jade trading llc v united_states supra pincite funneling the trades through the partnership was crucial for tax purposes to have the individual partners contribute the spreads to jade and redeem the unexercised spreads from jade in order to generate the inflated bases maguire partners-master invs llc v united_states supra pincite ustc par big_number at big_number there is no evidence that the contribution to the partnerships which was part of the design of the prepackaged transactions had any effect ‘on the investment’s value quality or profitability ’ however the contribution was required for the creation of an increased basis stobie creek invs llc v united_states supra pincite this series of routings through the various investment vehicles nevertheless were an integral requirement for achieving the basis-enhancing effects of the j g strategy demonstrating the primary structure and function of these fxdot as tax-planning instruments over their nominal structure and function as investments by contributing the digital option spread to olentangy partners capital was able to increase its basis in the partnership by the value of the purchased long option while ignoring the sold short option under helmer v commissioner tcmemo_1975_160 and its progeny the bliss transaction executive summary discussed above sheds light on the decision to contribute the digital option spread to olentangy partners and lends support to respondent’s argument that the transaction as a whole lacked economic_substance step of the summary provided that 4we do not decide whether helmer v commissioner tcmemo_1975_160 requires or allows this treatment of the contributed short option because we find the bliss transaction lacked economic_substance we do not consider respondent’s alternative arguments in support of the notice taxpayer contributes the purchased swap entered into to the partnership together with the short swap this contribution should result in taxpayer’s tax basis in his partnership or membership interest being equal to the cost of the swap contributed the short_sale swap is more_likely_than_not not treated as a liability for tax purposes achieving this result absent the benefit of the claimed tax loss there was nothing but a cashflow that was negative for all relevant periods--the ‘hallmark of an economic sham’ as the court_of_appeals for the sixth circuit has held dow chem co v united_states f 3d pincite quoting am elec power co v united_states 326_f3d_737 6th cir such a deal lacks economic_substance id because we find that the transaction at issue lacked economic_substance we do not consider mr wray’s and capital’s profit_motive in entering into the transaction id pincite illes v commissioner f 2d pincite rose v commissioner f 2d pincite pursuant to the aforementioned cases the bliss transaction must be ignored for federal_income_tax purposes accordingly the overstated loss claimed as a result of the sale of the cisco stock is disregarded as is the flowthrough loss from olentangy partners because we find that the bliss transaction lacked economic_substance we do not consider respondent’s alternative arguments in support of the notice v fees we next consider fees related to the bliss transaction on its federal_income_tax return new phoenix claimed a deduction of dollar_figure for fees paid to jenkens gilchrist to implement the bliss transaction and to provide the written tax opinion petitioner alleges that respondent erred by disallowing the claimed deduction respondent argues that petitioner is not entitled to deduct the legal fees because the transaction at issue lacked economic_substance respondent relies on 113_tc_254 affd 254_f3d_1313 11th cir and 85_tc_968 affd sub nom 843_f2d_351 9th cir respondent argues that petitioner cannot deduct the fees because those expenses relate to a transaction that lacks economic_substance petitioner contends that respondent’s reliance on winn-dixie stores inc subs and brown is inappropriate petitioner argues that the fees at issue in those cases were administrative fees connected with a disregarded corporate-owned life_insurance plan petitioner however argues that the fees paid to jenkens gilchrist were not administrative fees and are deductible under saba pship v commissioner tcmemo_1999_359 vacated and remanded 273_f3d_1135 d c cir petitioner’s reading of saba pship is overly broad the court in saba pship did not impose a broad rule that all nonadministrative fees paid in connection with a disregarded transaction are allowed as deductions in saba pship we held that where the taxpayer’s purchases of private_placement notes ppns and certificates of deposit cds were disregarded for lack of economic_substance and because the taxpayer was not required to include in income payments received pursuant to the purchase and sale of those ppns and cds the taxpayer was not entitled to deduct fees related to those transactions id where the taxpayer was required to include in income payments received from their participation in the purchases and sales it was allowed to deduct related fees jenkens gilchrist was paid dollar_figure however the invoice does not provide any detail concerning what the fees were for it simply states that the dollar_figure was for legal services rendered jenkens gilchrist was intimately involved in the development promotion sale and implementation of the bliss transaction and provided a tax opinion meant to shield the purchaser from penalties should the transaction be challenged a finding that the bliss transaction lacks economic_substance does not trigger an inclusion of the type of income to petitioner that justified the deduction of related fees in saba pship v commissioner supra capital paid jenkens gilchrist to implement a transaction that we have held lacks economic_substance accordingly petitioner is not entitled to a dollar_figure deduction for legal fees paid to jenkens gilchrist see winn-dixie stores inc subs v commissioner supra pincite brown v commissioner supra pincite1 vi penalties sec_6662 imposes an accuracy-related_penalty on certain underpayments of tax and the amount of the penalty is computed as a percentage of the underpayment the explanation of items attached to the notice imposed alternative sec_6662 penalties including penalties for a gross_valuation_misstatement negligence and a substantial_understatement_of_income_tax sec_1_6662-2 income_tax regs provides that only one accuracy-related_penalty may be imposed with respect to any given portion of an underpayment even if that portion is attributable to more than one of the types of conduct listed in sec_6662 see also jaroff v commissioner tcmemo_2004_276 we will take each penalty in turn and determine whether the individual penalty applies to petitioner’s underpayment should we determine that a penalty applies we will then determine whether petitioner satisfies the reasonable_cause exception in sec_6664 lastly should we find that petitioner is liable for a penalty on one or more grounds and that petitioner did not satisfy the reasonable_cause exception we will apply the antistacking provisions to determine how each penalty applies to the different portions of the underpayment a valuation_misstatement_penalty respondent argues that petitioner is liable for either a substantial or gross valuation penalty pursuant to sec_6662 and e or h sec_6662 imposes a percent penalty on that portion of an underpayment which results from a substantial_valuation_misstatement there is a substantial_valuation_misstatement if the value of any property claimed on the return is percent or more of the amount determined to be the correct amount sec_6662 sec_6662 increases the penalty to percent in the case of a gross_valuation_misstatement there is a gross_valuation_misstatement if the value is percent or more of the value determined to be the correct amount sec_6662 respondent argues that the gross_valuation_misstatement penalty applies because petitioner reported an adjusted_basis of dollar_figure in the cisco stock when the stock had a true basis of dollar_figure accordingly respondent contends petitioner’s reported basis is more than percent of the correct amount and the gross_valuation_misstatement penalty applies petitioner argues that the gross_valuation_misstatement penalty does not apply as a matter of law because should we disallow the claimed loss a basis_adjustment would not be required petitioner argues that should we disallow the loss on the cisco stock as a result of a finding that the bliss transaction lacked economic_substance the underpayment_of_tax would stem from a lack of economic_substance not a valuation misstatement petitioner points to 902_f2d_380 5th cir revg tcmemo_1988_408 893_f2d_225 9th cir affg tcmemo_1988_416 and 89_tc_912 affd 862_f2d_540 5th cir in support of this argument in heasley the court_of_appeals for the fifth circuit held that whenever the i r s totally disallows a deduction or credit the i r s may not penalize the taxpayer for a valuation_overstatement included in that deduction or credit in such a case the underpayment is not attributable to a valuation_overstatement instead it is attributable to claiming an improper deduction or credit id pincite we begin by noting that heasley is distinguishable in heasley the court_of_appeals reasoned that a valuation penalty should not apply where a deduction is disallowed in full because the amount of the taxpayer’s liability does not depend on a misvaluation the taxpayer’s liability is based upon the disallowance of the entire deduction id pincite in this case the heasleys’ actual tax_liability does not differ one cent from their tax_liability with the valuation_overstatement included in other words the heasleys’ valuation_overstatement does not change the amount of tax actually owed petitioner had some basis in the cisco stock apart from the basis claimed as a result of entering into the bliss transaction heasley does not apply because by disallowing overvalued basis we are not disallowing the entire deduction claimed as a result of the sale of the cisco stock respondent also points to 982_f2d_163 6th cir and argues that the court_of_appeals for the sixth circuit does not follow the heasley line of cases in illes v commissioner supra pincite the court held that a valuation_misstatement_penalty applies in situations in which an underpayment stems from disallowed deductions or credits due to lack of economic_substance in the instant proceeding the deficiency resulted directly from the incorrect basis in the cisco stock new phoenix reported a basis of dollar_figure in the cisco stock the correct basis was dollar_figure the reported basis is more than percent of the correct basis and the underpayment results directly from this overstatement accordingly petitioner is liable for a 40-percent gross_valuation_misstatement penalty see id see also 990_f2d_893 6th cir affg donahue v commissioner tcmemo_1991_181 cf 556_f3d_1056 9th cir affg in part and revg in part tcmemo_2006_131 b substantial_understatement_of_income_tax respondent argues that petitioner is liable for the percent accuracy-related_penalty for a substantial_understatement_of_income_tax pursuant to sec_6662 the 20-percent accuracy-related_penalty will apply where the 40-percent gross valuation penalty does not for corporate taxpayers there is a substantial_understatement_of_income_tax if the understatement exceeds the greater of percent of the tax required to be shown on the return or dollar_figure sec_6662 sec_1_6662-4 income_tax regs sec_6662 however provides that the amount of an understatement is reduced for any item that is supported by substantial_authority sec_1_6662-4 income_tax regs provides that the substantial_authority standard is an objective standard involving an analysis of the law and application of the law to relevant facts the substantial_authority standard is less stringent than the more_likely_than_not standard the standard that is met when there is a greater than 50-percent likelihood of the position being upheld but more stringent than the reasonable basis standard as defined in sec_1_6662-3 income_tax regs sec_6662 provides that the reduction for substantial_authority does not apply to tax_shelters sec_6662 defines the term tax_shelter as a partnership or other entity any investment plan or arrangement or any other plan or arrangement if a significant purpose of such partnership entity plan or arrangement is the avoidance or evasion of federal_income_tax respondent argues that new phoenix was required to show a tax of dollar_figure on its return because new phoenix reported a tax of only dollar_figure respondent contends new phoenix understated its tax_liability by dollar_figure which exceeds both dollar_figure and percent of the tax required to be shown on the return petitioner argues that it did not substantially understate its income_tax because it had substantial_authority for the position taken on its tax_return respondent argues that petitioner should not be able to avail itself of the substantial_authority safe_harbor because new phoenix did not have substantial_authority for its position and the transaction was a tax_shelter respondent argues that the bliss transaction regardless of outcome was guaranteed to provide capital with a dollar_figure million tax loss and tax_avoidance was a significant purpose of the transaction we find that petitioner lacked substantial_authority for the position taken on its return although petitioner claims to have relied on caselaw in taking the position that the sold short option was contingent and not required to be taken into account when calculating capital’s basis in olentangy partners petitioner’s advisers were aware of government efforts to combat abusive tax_shelters that called that conclusion into question before new phoenix filed its tax returns mr wray mr litt and mr daugerdas all knew that the government was investigating transactions substantially_similar to the transaction at issue mr litt voiced his concerns to mr wray and spoke with mr daugerdas on numerous occasions specifically about sec_6662 penalties and how similar the bliss transaction was to those transactions described in notice_2000_44 supra and subsequent irs releases these releases cast doubt on any claimed reliance on helmer v commissioner tcmemo_1975_160 and its progeny and petitioner cannot claim to have had substantial_authority for its return position see jade trading llc v united_states fed cl pincite at bottom the fictional nature of the transaction and its lack of economic reality outweigh helmer in the substantial_authority assessment cf 440_fsupp2d_608 e d tex accordingly petitioner substantially understated its income_tax_liability and is liable for a 20-percent accuracy-related_penalty c negligence and disregard of rules lastly respondent argues that petitioner is liable for a percent accuracy-related_penalty for negligence and disregard of rules or regulations sec_6662 provides that the term ‘negligence’ includes any failure to make a reasonable attempt to comply with the provisions of this title and the term ‘disregard’ includes any careless reckless or intentional disregard sec_1_6662-3 income_tax regs provides that negligence is strongly indicated where a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction credit or exclusion on a return which would seem to a reasonable and prudent person to be ‘too good to be true’ under the circumstances respondent argues that the tax benefits from the bliss transaction were too good to be true that petitioner was negligent and that petitioner disregarded rules and regulations in its reporting of the transaction at issue respondent points to mr wray’s lack of investigation and argues that mr wray failed to apply his financial background to the digital option spread respondent contends that mr wray had the financial acumen to correctly evaluate the profit potential of the digital option spread and to properly value it respondent further contends that the disparity between the out-of-pocket costs of the bliss transaction and the expected tax benefits would have alerted a reasonable and prudent person that the benefits were too good to be true respondent disputes mr wray’s testimony concerning his research and argues that any research mr wray eventually did was only meant to serve as a pretext and was done after deciding to enter into the bliss transaction lastly respondent argues that petitioner acted negligently because at the time it reported the bliss transaction new phoenix and its advisers were aware of the irs investigation and position concerning transactions similar to the one at issue yet relied on jenkens gilchirst and improperly reported the bliss transaction petitioner argues that it was not negligent because at the time it entered into the transaction caselaw supported the position taken on its return petitioner again points to helmer v commissioner supra and other cases holding that assumption of a contingent_liability by a partnership does not reduce a partner’s basis in that partnership we agree with respondent at the time petitioner reported the bliss transaction on its return new phoenix and its advisers knew that reliance on helmer was misplaced new phoenix filed its return well after the irs issued notice_2000_44 supra was aware of recent developments in this area of tax law and did not seek independent advice to guarantee proper reporting of the bliss transaction see 299_f3d_221 3d cir as highly educated professionals the individual taxpayers should have recognized that it was not likely that by complex manipulation they could obtain large deductions for their corporations and tax free income for themselves affg 115_tc_43 accordingly the negligence_penalty applies see pasternak v commissioner f 2d pincite stobie creek invs llc v united_states fed cl pincite jade trading llc v united_states fed cl pincite maguire partners-master invs llc v united_states aftr 2d pincite ustc par big_number at big_number d reasonable_cause and good_faith separate from its arguments that it had substantial_authority for its position and did not act negligently petitioner argues that it acted with reasonable_cause and in good_faith in its reporting of the bliss transaction because petitioner obtained a written tax opinion from a nationally recognized and well respected law firm sec_6664 provides that no penalty shall be imposed under sec_6662 with respect to any portion of an underpayment if it is shown that there was a reasonable_cause for such portion and that the taxpayer acted in good_faith with respect to such portion if petitioner is able to show reasonable_cause for the position taken on its return the penalties discussed above will not apply the decision as to whether the taxpayer acted with reasonable_cause and good_faith depends upon all the facts and circumstances sec_1_6664-4 income_tax regs relevant factors include the taxpayer’s efforts to assess his proper tax_liability including the taxpayer’s reasonable and good_faith reliance on the advice of a professional such as an accountant or attorney petitioner draws support for its reasonable_cause and good_faith argument from 469_us_241 in which the supreme court stated that when an accountant or attorney advises a taxpayer on a matter of tax law such as whether a liability exists it is reasonable for the taxpayer to rely on that advice respondent concedes that under boyle taxpayers need not second-guess their independent professional advisers but argues that jenkens gilchrist was not independent but rather was a promoter of the bliss transaction accordingly respondent argues it was not reasonable for petitioner to rely on an opinion written by jenkens gilchrist respondent points to pasternak v commissioner supra in support of his position in pasternak the court_of_appeals for the sixth circuit rejected a taxpayer’s argument that negligence penalties under sec_6653 should not be imposed because the taxpayer relied on the advice of ‘financial advisors industry experts and professionals’ id pincite the court stated that the purported experts were either the promoters themselves or agents of the promoters advice of such persons can hardly be described as that of ‘independent professionals ’ id in 440_f3d_375 6th cir affg tcmemo_2004_279 the court further stated that in order for reliance on professional tax_advice to be reasonable the advice must generally be from a competent and independent advisor unburdened with a conflict of interest and not from promoters of the investment we find petitioner’s reliance on jenkens gilchrist and the tax opinion to be unreasonable rather than reasonable jenkens gilchrist actively participated in the development structuring promotion sale and implementation of the bliss transaction petitioner was not reasonable in relying on the tax opinion in the face of such a conflict of interest see neonatology associates p a v commissioner supra pincite pasternak v commissioner supra pincite illes v commissioner f 2d pincite maguire partners-master invs llc v united_states supra pincite ustc par big_number at big_number furthermore the partnerships have failed to demonstrate that they sought and received disinterested and objective tax_advice because the tax_advice that they did receive came from arthur andersen which also arranged the transactions resulting in the increased basis that is at issue in this case stobie creek invs llc v united_states supra pincite the evidence nonetheless unequivocally establishes that both j g and slk were tainted by conflict-of-interest as discussed above mr litt had concerns about the reporting of the bliss transaction mr litt informed mr wray of these concerns and had numerous discussions with mr daugerdas centered on the applicability of sec_6662 penalties and recent irs developments mr litt also sent mr wray copies of tax publication articles detailing the treasury_department and the irs’ actions concerning alleged abusive tax_shelters see maguire partners-master invs llc v united_states supra pincite ustc par big_number at big_number these documents show that at the time new phoenix and its advisers were considering the proper reporting of the transaction mr litt and mr wray were aware that the government was investigating transactions similar to the transaction at issue these concerns should have put new phoenix on notice that the reporting of the bliss transaction as recommended by jenkens gilchrist was unacceptable petitioner should have also known that jenkens gilchrist had a personal stake in the bliss transaction and could not be relied upon to provide independent advice that petitioner’s independent advisers had significant questions about the bliss transaction should have caused mr wray to question jenkens gilchrist’s assurances that the transaction was reported properly these factors should have put petitioner on notice that reliance on jenkens gilchrist was unreasonable and that petitioner would have to consult with independent counsel in order to determine the propriety of new phoenix’s reporting see pasternak v commissioner f 2d pincite illes v commissioner supra pincite see also watson v commissioner tcmemo_2008_276 ghose v commissioner tcmemo_2008_80 it was unreasonable for petitioner and mr wray to rely on jenkens gilchrist in view of the surrounding facts in summary jenkens gilchrist’s conflict of interest and petitioner’s knowledge of recent developments in tax law should have convinced petitioner of the need for further investigation into the proper reporting of the bliss transaction petitioner claimed a fictional loss of nearly dollar_figure million this is exactly the type of too good to be true transaction that should cause taxpayers to seek out competent advice from independent advisers 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 stobie creek invs llc v united_states supra pincite relying on neonatology associates p a holding that the jenkens gilchrist strategy is the type that should appear to be too good to be true petitioner’s decision to rely exclusively on jenkens gilchrist in reporting the bliss transaction was therefore not reasonable petitioner did not have reasonable_cause for its position and did not take that position in good_faith accordingly petitioner remains liable for the sec_6662 penalties e conclusion only one accuracy-related_penalty may be applied with respect to any given portion of an underpayment even if that portion is characterized by more than one of the types of conduct described in sec_6662 sec_1_6662-2 income_tax regs as discussed above petitioner is liable for an accuracy-related_penalty because of a gross_valuation_misstatement a substantial_understatement_of_income_tax and negligence sec_1 c income_tax regs prevents the commissioner from stacking these amounts to impose a penalty greater than the maximum penalty of percent on any given portion of an underpayment or percent if such portion is attributable to a gross_valuation_misstatement see jaroff v commissioner tcmemo_2004_276 accordingly petitioner is liable for the 40-percent accuracy-related_penalty on that portion of the underpayment stemming from its overvaluation of the cisco stock and a percent accuracy-related_penalty on the remainder of the underpayment stemming from the disallowed flowthrough loss from olentangy partners and from the disallowed deduction for payments made to jenkens gilchrist vii conclusion respondent’s determinations in the notice are upheld and petitioner is liable for the sec_6662 accuracy-related_penalty accordingly decision will be entered for respondent


internal_revenue_service department of the treasury washington dc q person to contact telephone number refer reply to pdqp e ep t jan ig99 on significant index nos legend grantor ira x custodian a beneficiary e beneficiary f dear this is in response to your request for a private_letter_ruling dated date as amended by a letter dated date submitted on your behalf by your authorized representative in support of your request your authorized representative has submitted the following facts and representations grantor was born on date and maintained ira x with custodian a grantor attained age during the calendar_year and his date of death was date grantor’s required_beginning_date with respect to the commencement of required minimum distributions under sec_401 of the internal_revenue_code code from ira x was date grantor designated_beneficiary e and beneficiary f on date each having a percent interest in ira x ira x contains the following pertinent provisions relating to minimum required distributions section under article viii entitled minimum distribution_requirements of ira x provides-- page prior to his her required_beginning_date the individual must choose whether or not to recalculate life expectancies for the individual participant and his her spouse if applicable for purposes of determining his her required_minimum_distribution life expectancy is computed by use of the expected_return multiples in tables v and vi of sec_1_72-9 of the income_tax regulations unless otherwise elected by the individual participant at the time of commencement of distributions under sec_8_1 or if applicable by the surviving_spouse where the individual participant dies before distributions have commenced life expectancies of an individual participant or spouse beneficiary shall be recalculated annually for purposes of distributions under sec_8_1 and an election not to recalculate shall be irrevocable and shall apply to all subsequent years the life expectancy of a non-spouse beneficiary shall not be recalculated instead life expectancy will be calculated using the attained age of such beneficiary during the calendar_year in which the individual attains age and payments for subsequent years shall be calculated based on such life expectancy reduced by one for each calendar_year which has elapsed since the calendar_year life expectancy was first calculated sec_8_1 of ira x provides-- not later than the required_beginning_date the individual participant may elect on a form acceptable to custodian a to have the balance in ira x distributed at least as rapidly as one of the following forms a b c a single lump sum payment payable not later than the required_beginning_date in periodic_payments at least annually over a period certain not extending beyond the life expectancy of the individual participant in periodic_payments at least annually over a period certain not extending beyond the joint and last survivor expectancy of the individual participant and his her beneficiary notwithstanding the fact that distributions may have commenced the individual participant or beneficiary may by written notice to custodian a elect to receive a lump sum distribution of the balance in ira x or elect that the balance in ira x be distributed over a shorter period than the period which he she previously elected section of ira x provides-- if the individual participant dies before his her entire_interest is distributed the entire remaining interest will be distributed as follows a if the individual participant dies on or after distributions have begun under section - e i s o m o o a y a page the entire remaining interest must be distributed at least as rapidly as under the method of distribution elected by such individual participant grantor prior to attaining his required_beginning_date of date did not file an election with custodian a to elect out of the recalculation method with respect to determining his required minimum distributions grantor could have made such an election pursuant to the provisions of section of ira x but he did not grantor did not elect a distribution period with custodian a pursuant to the provisions of sec_8_1 according to the information received from custodian a grantor received his required minimum distributions during his lifetime based upon a single life expectancy which was recalculated each year grantor continued to receive this as a partial_distribution of his required_minimum_distribution for the calendar_year during the early part of beneficiary e and beneficiary f received the balance of the required_minimum_distribution that grantor would have received during the calendar_year based upon his single recalculated life expectancy as determined in the calendar_year in the calendar_year that grantor attained age beneficiary e had the shortest life expectancy of the two designated beneficiaries beneficiary e was bom on date and her single life expectancy wa sec_42 in the calendar_year that grantor attained age ' the remaining term-certain with respect to beneficiary e as of the calendar_year following grantor’s death wa sec_37 beneficiary f was born on date and his single life expectancy wa sec_45 in the year that grantor attained age the remaining term certain period with tespect to beneficiary f as of the calendar_year wa sec_40 based on the above you request the following letter rulings g3 that beneficiary e is a designated_beneficiary for purposes of sec_401 of the code with respect to ira x that beneficiary e was timely selected as a designated_beneficiary of ira x for purposes of sec_401 of the code that grantor’s use of the single recalculated life expectancy in determining his required minimum distributions during his lifetime does not preclude the use of the term certain life expectancy of the oldest designated_beneficiary in the calendar_year after the death of grantor that in determining the required minimum distributions after the death of grantor that beneficiary e may use the remaining term-certain life expectancy of page beneficiary e since she is the oldest non-spouse designated_beneficiary commencing in the calendar_year and reduced by one for each calendar_year thereafter sec_408 of the code defines an individual_retirement_account as a_trust which meets the requirements of sec_408 through a sec_408 of the code states that under regulations prescribed by the secretary rules similar to the rules of sec_401 and the incidental death_benefit requirements of sec_401 shall apply to the distribution of the entire_interest of an individual for whose benefit the ira trust is maintained sec_401 of the code sets forth the general rules applicable to required minimum distributions from qualified_plans sec_401 of the code provides that a_trust shall not constitute a qualified_trust under this subsection unless the plan provides that the entire_interest of each employee will be distributed beginning not later than the required_beginning_date in accordance with regulations over the life of such employee or over the lives of such employee and a designated_beneficiary or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated_beneficiary sec_401 of the code provides that for purposes of this paragraph the term required_beginning_date means april of the calendar_year following the later of i the year in which the employee attains age or ii the calendar_year in which the employee retires sec_401g of the code provides that where distributions have begun under subparagraph a ii a_trust shall not constitute a qualified_trust under this section unless the plan provides that if-- the distribution of the employee’s interest has begun in accordance with subparagraph a ii and the employee dies before his entire_interest has been distributed to him the remaining portion of such interest will be distributed at least as rapidly as under the method of distributions being used under subparagraph a ii as of the date of his death sec_1_401_a_9_-1 of the proposed income_tax regulations proposed_regulations q a d-2 a provides in pertinent part that designated beneficiaries are only individuals who are designated as beneficiaries under the plan designated as a beneficiary under the plan either by the terms of the plan or if the plan provides by an affirmative election by the employee or the employee’s surviving_spouse specifying the beneficiary a beneficiary designated as such under the plan is an individual who is entitled to a _ portion of an employee’s benefit contingent on the employee’s death or another specified event in general it provides that an individual may be of w995 page sec_1_401_a_9_-1 of the proposed_regulations q a d-3 a provides that for purposes of calculating the distribution period described in sec_401 for distributions before death the designated_beneficiary will be determined as of the employee’s required_beginning_date if as of that date there is no designated_beneficiary under the plan to receive the employee’s benefit upon the employee’s death the distribution period is limited to the employee’s life or a period not extending beyond the employee’s life expectancy in the present case beneficiary e was designated as a beneficiary under ira x by an affirmative election specifying the beneficiary by grantor on date through use of a form provided by custodian a entitled beneficiary designation or method of payment request beneficiary e is entitled to a portion of grantor’s benefit-contingent on grantor’s death since ’ beneficiary e was named a designated_beneficiary on date which was before grantor’s required_beginning_date of date beneficiary e was selected in a timely manner for purposes of calculating the distribution period described in sec_401 of the code accordingly with regard to ruling_request one we conclude that beneficiary e is a designated_beneficiary for purposes of sec_401 with respect to ira x with respect to ruling_request two we conclude that beneficiary e was timely selected as a designated_beneficiary of ira x for purposes of sec_401 of the code sec_401 of the code permits an employee and his spouse to recalculate their _ life expectancies annually sec_1_401_a_9_-1 of the proposed_regulations q a e-8 a provides guidance on how an employee’s life expectancy is recalculated and provides that upon the death of the employee the recalculated life expectancy of the employee or the employee’s spouse will be reduced to zero in the calendar_year following the calendar_year of death in any calendar_year in which the last applicable life expectancy is reduced to zero the plan must distribute the employee’s entire remaining interest prior to the last day of such year in order to satisfy sec_401 sec_1_401_a_9_-1 of the proposed_regulations q a e-8 b provides guidance on calculating the applicable life expectancy when the employee’s life expectancy is being recalculated and the life expectancy of his designated_beneficiary is not recalculated it provides in relevant part that if the designated_beneficiary is not the employee’s spouse and the life expectancy of the employee is being recalculated annually the applicable life expectancy for determining the minimum distribution for each distribution calendar_year will be determined by recalculating the employee’s life expectancy but not recalculating the beneficiary’s life expectancy such applicable life expectancy is the joint and last survivor expectancy using the employee’s attained age as of the employee’s birthday in the distribution calendar_year and an adjusted age of the designated_beneficiary the adjusted age of the designated_beneficiary is determined as follows first the beneficiary’s applicable life expectancy is calculated based on the beneficiary’s attained age as of the beneficiary’s birthday in the calendar_year described in e-1 reduced by one page for each calendar_year which has elapsed since that calendar_year the age rounded if necessary to the higher age in table v of sec_1_72-9 is then located which corresponds to the designated beneficiary’s applicable life expectancy such age is the adjusted age of the designated_beneficiary as provided in paragraph a upon the death of the employee the life expectancy of the employee is reduced to zero in the calendar_year following the calendar_year of the employee’s death thus for determining the minimum distribution for such calendar_year and subsequent calendar years the applicable life expectancy is the applicable life expectancy of the designated_beneficiary determined under this paragraph sec_1_401_a_9_-1 of the proposed_regulations q a e-1 a provides generally that for required distributions under sec_401 of the code life expectancies are calculated using the employee’s and the designated beneficiary’s attained age as of the employee’s birthday and the designated beneficiary’s birthday in the calendar_year in which the employee attains age sec_1_401_a_9_-1 of the proposed_regulations q a e-5 a provides generally that if more than one individual is designated as a beneficiary with respect to an employee as of the applicable_date for determining the designated_beneficiary the designated_beneficiary with the shortest life expectancy will be the designated_beneficiary for purposes of determining the distribution period because grantor’s life expectancy was being recalculated upon his death in accordance with q a e-8 a of sec_1_401_a_9_-1 of the proposed_regulations his life expectancy was _ reduced to zero although his benefit was paid in the form of a single life expectancy upon his death his life expectancy was not the last applicable life expectancy because he timely designated his beneficiaries by his required_beginning_date in accordance with q a d-3 a of the proposed_regulations therefore pursuant to q a e-8 b of sec_1_401_a_9_-1 of the proposed_regulations for purposes of determining the minimum distribution in the calendar_year after the death of grantor the applicable life expectancy is the life expectancy of the designated_beneficiary as determined under that section since more than one individual was designated as a beneficiary with respect to the grantor as of date pursuant to sec_1_401_a_9_-1 of the proposed_regulations q a e- a the beneficiary who is the oldest and correspondingly who has the shortest life expectancy will be the designated_beneficiary for purposes of determining the distribution period under ira x therefore with regard to ruling_request three we conclude that grantor’s use of the single recalculated life expectancy in determining the required minimum distributions during his lifetime does not preclude the use of the term-certain life expectancy of the oldest designated_beneficiary in the calendar_year after grantor’s death w sec_536 oe e eo page beneficiary e had the shortest life expectancy of the two designated beneficiaries on grantor’s required_beginning_date date therefore she should be the designated_beneficiary whose life expectancy will be used when determining the minimum distribution period under ira x for the calendar_year commencing after the year of grantor’s death and for all subsequent years thereafter pursuant to q as e-1 a and e-8 b of the proposed_regulations beneficiary e’s applicable life expectancy is calculated based on her attained age as of her birthday in the calendar_year in which grantor attained age reduced by one for each calendar_year which has elapsed since that calendar_year her single life expectancy in the year that grantor attained age wa sec_42 therefore as of the calendar_year the remaining term-certain period with respect to beneficiary e i sec_37 years pursuant to q a e-8 b this period is reduced by one for each calendar_year subsequent to accordingly with respect to ruling_request four we conclude that beneficiary e may use her remaining term-certain life expectancy in determining the required minimum distributions after grantor’s death since she is the oldest non-spouse designated_beneficiary commencing in the calendar_year and reduced by one for each calendar_year thereafter the above ruling is contingent upon the continuation of ira x as one described under sec_408 of the code a copy of this ruling is being sent to your authorized representative in accordance with a power_of_attorney on file in this office sincerely yours aged sovor b bath joyce e floyd chief employee_plans technical branch enclosures deleted copy of this letter notice of intention to disclose cc


t c memo united_states tax_court pamela o'rourke petitioner v commissioner of internal revenue respondent docket no filed date kevin j mirch for petitioner david w sorensen for respondent memorandum findings_of_fact and opinion dean special_trial_judge this case was assigned pursuant to the provisions of sec_7443a and rule sec_180 sec_181 and sec_182 respondent determined additions to petitioner's federal_income_tax as follows 1unless otherwise indicated all section references are to the internal_revenue_code in effect for the year at issue and all rule references are to the tax_court rules_of_practice and procedure additions to tax_year sec_6653 sec_6653 sec_6661 dollar_figure percent of dollar_figure the interest due on dollar_figure the issues for decision are whether the notice_of_deficiency was issued after the period of limitations for the assessment and collection_of_taxes for petitioner's tax_year expired and whether petitioner is liable for additions to tax under sec_6653 and and sec_6661 for the tax_year some of the facts have been stipulated and are so found the stipulation of facts and the exhibits received into evidence are incorporated herein by reference petitioner resided in reno nevada at the time she filed her petition findings_of_fact during petitioner worked for cal-sierra financial services and also for spectra financial network spectra a financial planning company spectra was involved in the marketing of limited_partnership interests in barbados ltd barbados petitioner invested in barbados on the recommendation of her then-boss kent maerki on her federal_income_tax return petitioner reported a dollar_figure schedule 2mr maerki was not an attorney or a c p a and no evidence was offered regarding his professional credentials or his knowledge of the barbados venture e loss attributable to her investment as a limited_partner in barbados opinion respondent's determinations contained in the notice_of_deficiency are presumed correct and petitioner bears the burden of proving otherwise rule a 290_us_111 statute_of_limitations the notice_of_deficiency was issued to petitioner on date for additions to tax associated with petitioner's distributive_share of partnership items respondent determined that petitioner is liable for additions to tax provided in sec_6653 and sec_6661 petitioner contends that she is not liable because having filed her federal_income_tax return on date the 3-year statutory period of limitations provided in sec_6501 expired before issuance of the notice_of_deficiency under the general_rule set forth in sec_6501 the secretary is required to assess the tax within years after the taxpayer's return is filed sec_6501 in the case of the tax imposed on partnership items however section sets forth special rules to extend the period of limitations prescribed by sec_6501 see sec_6501 section a provides that the period for assessing income_tax attributable to a partnership_item or affected_item for a partnership taxable_year shall not expire before years after the later of the date the partnership return for such year was filed or the last day for filing such return for such year without regard to extensions however section d provides that the mailing of a final_partnership_administrative_adjustment suspends the running of the 3-year limitations_period for the period during which an action may be brought under sec_6226 and if an action is brought until the decision of the court has become final and for year thereafter the stipulation of facts includes a copy of the decision entered regarding barbados which is dated date under section d the running of the 3-year period of limitations for assessing a deficiency attributable to a partnership_item was suspended for year after the date the decision entered on date became final the decision became final no earlier than date days after it was entered sec_7481 sec_7483 the notice_of_deficiency was issued to petitioner on date consequently the notice_of_deficiency relating to the affected items the additions to tax was timely issued negligence sec_6653 imposes an addition_to_tax if any portion of an underpayment is due to negligence or intentional disregard 3the additions to tax determined by respondent are affected items sec_301_6231_a_5_-1t d temporary proced admin regs fed reg date of rules or regulations sec_6653 imposes an addition_to_tax in an amount equal to percent of the interest due on the portion of the underpayment attributable to negligence negligence is defined as the failure to exercise the due care that a reasonable and ordinarily prudent person would employ under the circumstances 85_tc_934 thus to avoid imposition of the addition_to_tax petitioner must prove that her actions in connection with the loss from the barbados venture were reasonable in light of her experience and the nature of the investment see 60_tc_728 lucas v commissioner tcmemo_1995_341 petitioner offered very little evidence to refute respondent's determination of negligence the only evidence in the record regarding petitioner's evaluation of the investment consists of her testimony that she read certain documents and that she relied on the recommendation of mr maerki no prospectus or offering memorandum was introduced no evidence of the nature of the investment was offered and no witnesses save for petitioner testified at trial petitioner asserted in her petition that she was not negligent because she acted under advice of counsel in the preparation of the return yet she offered no evidence to support this assertion based upon the record in this case we find that petitioner has not overcome respondent's determination of negligence we therefore sustain respondent's determination that petitioner is liable for the additions to tax under sec_6653 and for the tax_year sec_6661 addition_to_tax in the notice_of_deficiency respondent determined the sec_6661 addition_to_tax at a rate of percent of the underpayment for that year as originally enacted sec_6661 provided for an addition_to_tax of percent of the amount of any underpayment attributable to a substantial_understatement_of_income_tax liability applicable to returns due after date tax equity and fiscal responsibility act of publaw_97_248 sec 96_stat_324 in congress amended sec_6661 and provided for an addition_to_tax of percent where the assessment is made after date omnibus budget reconciliation act of publaw_99_509 100_stat_1874 see also 90_tc_498 although respondent correctly refers to the rate of the addition a sec_25 percent in her synopsis of legal authorities in her trial memorandum she made no mention of the discrepancy between this rate and the percent rate used in the notice_of_deficiency and has not sought to amend the pleadings to assert an increase sec_6214 grants this court jurisdiction to determine a deficiency or addition_to_tax larger than that stated in the notice_of_deficiency if respondent claims the increased amount at or before the hearing or a rehearing we may not however determine a greater deficiency where respondent has not pleaded an increased deficiency 52_f2d_1071 9th cir revg 13_bta_525 81_tc_260 affd 738_f2d_67 2d cir 69_tc_473 in the instant case respondent has not specifically addressed the issue and has not requested an increase in the addition_to_tax under sec_6661 in these circumstances we cannot conclude that respondent has asserted a claim for the increased amount as required by sec_6214 nor that the issue has been tried by consent of the parties within the meaning of rule b thus we shall apply the addition if determined to be applicable at the rate set forth in the notice_of_deficiency sec_6661 provides that an addition_to_tax is imposed on any underpayment attributable to a substantial_understatement_of_income_tax petitioner bears the burden of proving that she is not liable for this addition_to_tax rule a 98_tc_511 an understatement is substantial if it exceeds the greater of percent of the amount required to be shown on the return for the taxable_year or dollar_figure sec_6661 an understatement is the amount by which the amount required to be shown on the return exceeds the amount actually shown on the return sec_6661 petitioner's case meets this threshold requirement petitioner admitted in her petition that barbados was a tax_shelter thus the adequate_disclosure exception of sec_6661 does not apply sec_6661 moreover even if barbados was not a tax_shelter petitioner does not qualify for the adequate_disclosure exception because she has not shown that she provided sufficient information on her return to enable the commissioner to identify the potential controversy involved if however a taxpayer has substantial_authority for the tax treatment of a tax_shelter_item on her return and reasonably believed her tax treatment of the item was more_likely_than_not the proper tax treatment the understatement is reduced by the amount attributable to such item sec_6661 the only evidence in the record concerning petitioner's evaluation of the economic aspects of the partnership is her testimony that she overlooked their documents and relied on mr maerki's recommendation in short petitioner presented insufficient evidence to show that she or her adviser made the kind of independent factual analysis of barbados that would enable her to formulate a reasonable belief as to the tax treatment of the item and to determine whether the claimed loss was more_likely_than_not the proper tax treatment accordingly we hold that petitioner is liable for the sec_6661 addition_to_tax as determined by respondent using the percent rate for the tax_year to reflect the foregoing decision will be entered for respondent