t c memo united_states tax_court buyuk llc boyalik llc a partner other than the tax_matters_partner petitioner v commissioner of internal revenue respondent beyazit llc rp capital partners llc a partner other than the tax_matters_partner petitioner v commissioner of internal revenue respondent docket no filed date eric e kalnins and gabriel g tsui for petitioners jennifer n brock gretchen ann kindel and jeffrey s luechtefeld for respondent memorandum findings_of_fact and opinion laro judge these cases are partnership-level proceedings subject_to the unified_audit and litigation procedures of the tax equity and fiscal responsibility act of pub_l_no sec_402 stat pincite in separate notices of final_partnership_administrative_adjustment fpaa respondent disallowed a deduction of dollar_figure that buyuk llc buyuk claimed on its form_1065 u s return of partnership income and a deduction of dollar_figure that beyazit llc beyazit claimed on its form_1065 the fpaas also determined among other things accuracy-related_penalties applied to any underpayments of tax attributable to the disallowances respondent’s primary determination in that respect was that for each partnership the penalty equaled of the underpayment because of a gross_valuation_misstatement under sec_6662 alternatively respondent determined that the penalty equaled of the underpayment because of negligence or disregard of rules or regulations under sec_6662 a substantial_understatement_of_income_tax under sec_6662 or a substantial_valuation_misstatement under sec_6662 as a unless otherwise indicated section references are to the internal_revenue_code in effect for the year in issue code rule references are to the tax_court rules_of_practice and procedure and some dollar amounts are rounded result of our findings today under the concepts of disguised sales under sec_707 the substance over form and step transaction doctrines and the economic_substance_doctrine we sustain respondent’s determinations in the fpaas to the extent set out in this opinion findings_of_fact the parties filed with the court a stipulation of facts and a supplemental stipulation of facts both with accompanying exhibits those facts and exhibits are incorporated herein by this reference we find the facts accordingly buyuk’s and beyazit’s principal_place_of_business was greenwich connecticut when the petitions were filed gramercy advisors llc marc helie and robert koenigsberger founded gramercy advisors llc in to manage hedge funds investing in emerging market debts gramercy advisors’ affiliated entities include gramercy asset management llc gramercy financial services llc gfs and mead point capital management llc collectively gramercy from its inception to at least gramercy operated its flagship fund the gramercy emerging markets fund gemf using several feeder entities one feeder was an llc for domestic investors and another was a cayman islands company for foreign investors a domestic investor would purchase a membership interest in gemf llc and gramercy itself would not have an equity_interest in that llc the gemf invested primarily in distressed defaulted or undervalued emerging market debt securities issued by a country sovereign debt or a corporation corporate debt that were denominated in u s dollars the gemf did not invest in consumer receivables or accounts_receivable the gemf’s reason to focus on sovereign debt instruments was twofold first the concept of bankruptcy would not apply to a central government issuing the debt instruments further these types of instruments were susceptible to positive restructuring outcomes because of a sovereign government’s need to maintain access to global capital markets along the same vein as to corporate debt securities the gemf focused on foreign_corporations that were important to their respective countries’ economies in such a case the government of the foreign_country in which the foreign_corporation operated would have a vested interest in ensuring the viability of that corporation and thus favorable restructuring outcomes for international investors in the securities issued by the corporation these foreign_corporations the gemf targeted would also have mr helie testified that he might have purchased some distressed debts denominated in thai baht around and nothing in the record indicates gemf invested in any other debt denominated in local currency cross-border revenues and multinational assets that could mitigate the impact of any currency devaluations finally to avoid exposure to foreign exchange fluctuations and application of unfamiliar foreign laws the gemf concentrated on u s dollar denominated instruments issued in the international capital markets and subject_to the laws of either new york or the united kingdom the gemf’s investment philosophy did not include buying and holding an investment to earn interest or otherwise to collect on the debt securities instead it involved buying a sovereign or corporate debt security early and capitalizing on an increase in price by selling the security before an impending restructuring of the debt or after the restructuring at times mr helie would take an active role in the restructuring of the debt instruments in addition the gemf would typically purchase the debt_instrument directly instead of purchasing an interest in an entity holding the debt_instrument the gemf’s investors would pay an annual management fee of of assets under management a performance fee equal to of return net of management fee and expenses and a redemption fee of of the redeemed amount during the first months or off semiannual cycle after the first months gramercy also imposed concentration limits on the gemf’s investments intended to diversify the gemf’s portfolios and to prevent the fund from investing too heavily in one particular region or specific type of asset bdo seidman llp bdo seidman llp bdo is an accounting firm which from at least through promoted and sold a number of tax solutions products through its tax solutions group tsg bdo’s management marketed these tax solutions within the firm by providing incentives to its employees and partners for participating in the sales of these tax solutions these incentives included bonuses and firmwide recognition one form of recognition was a firmwide email with the subject line tax dollar_figureelldollar_figure announcing the sale of a tax solution the employee who generated the sale and the fee arising from the sale the amount of any bonus paid to an employee was tied to the net fee bdo was able to earn from selling a tax solution one of these tax solutions bdo promoted to its clients through tsg was a highly structured distressed_debt investment product bdo distressed_debt structure the bdo distressed_debt structure involved an investment in foreign consumer receivables with high cost_basis and low fair_market_value bdo required the consumer receivables be overdue and denominated in a foreign_currency that had suffered significant devaluation relative to the u s dollar under the bdo distressed_debt structure the foreign owner of the receivables would transfer and assign the receivables to a u s limited_liability_company llc under a contribution agreement in exchange for a membership interest in a master llc solely managed by a gramercy entity the master llc would then contribute the consumer receivables to a second llc level a llc in exchange for a membership interest in the level a llc a gramercy entity would also acquire and maintain a interest in the same llc the client would then acquire approximately of the master llc’s membership interest in the level a llc in exchange for cash after the client’s cash purchase of the membership interest in the level a llc the foreign company would redeem its membership interest in the master llc for cash the client would become the sole manager of the level a llc and contribute securities or additional cash to the level a llc the level a llc would then contribute the consumer receivables to a second llc level aa llc in exchange for a membership interest in the level aa llc the level a llc would own of the level aa llc and a gramercy entity would be the manager and own of the level aa llc following this contribution the consumer receivables would be swapped for assets of another gramercy llc to achieve the desired tax effect of recognizing the inherent loss in the consumer receivables to sell the tax sheltering product according to paul shanbrom a bdo employee from the tsg group someone from that group would typically first meet with the potential client with an understanding of the amount of tax loss the client was looking to generate to shelter the client’s income the bdo employee would discuss the distressed_debt investment product the steps and the mechanics involved in the structured transaction the types of investments the client would be making in the overall transaction and how the transaction would generate the desired tax loss to offset income in return for its devised structure and a tax opinion supporting the structure bdo would receive fees from the client the fees were based on a percentage of the tax loss to be generated which depended on the character of the desired tax loss to for ordinary losses and to for capital losses bdo would also pay a fee to gramercy for sourcing the distressed assets gramercy’s managed account business beginning at least by bdo began to refer clients to gramercy to facilitate its clients’ participation in the bdo distressed_debt structure to increase its client base gramercy was willing to accommodate these clients by expanding its operations to include an element that gramercy had not considered before this additional element involved the clients’ investing in distressed debts meeting bdo’s criteria outlined above dad account in exchange for implementing the distressed debts transactions through a dad account gramercy would require the bdo-referred client to make separate additional investments in instruments that mirrored gramercy’s traditional hedge fund business and tracked the gemf managed emf account appoint gramercy as its investment manager with respect to these accounts and contribute to these accounts specified amounts of cash these two types of investments a dad account and a managed emf account together formed what gramercy has referred to as a managed account for each client bdo referred each bdo-referred client or group of clients had his her or its own managed account for one managed account the bdo-referred client or a group of these clients would invest roughly of the desired tax loss in the managed account to facilitate a distressed_debt transaction through a dad account meeting the criteria for a bdo distressed_debt structure gramercy would source the qualified distressed debts on bdo’s behalf and receive a fee from bdo in return for the managed emf account gramercy invested in instruments of the same type and in the same proportion as those in which the gemf invested sourcing of the distressed debts mr helie was responsible for sourcing accounts_receivable used in the bdo distressed_debt structure and focused his search on receivables from russian utility companies with the type of inherent tax loss that bdo had asked for in that connection he solicited help from two individuals with whom he had previously worked rich straughan and gregor short to identify receivables that had suffered from ruble devaluation in when he was able to identify potential receivables to be acquired he engaged a russian law firm alm feldmans to provide advice on the particular transaction one such russian utility company whose accounts_receivable were so identified was oao saratovenergo saratov during the relevant times saratov an open joint_stock_company organized under the laws of the russian federation provided energy to consumers in the saratov region of russia and was part of the unified energy system which was a state-owned enterprise overseeing a consolidated_group of electric generation facilities in russia during the negotiation over the transfer of its receivables saratov expressed concerns that it would not immediately receive cash payment for its receivables mr helie understood saratov wanted cash for the receivables and not an interest in a u s llc however saratov’s concern was ameliorated once it was told that it would receive cash payments for its receivables as soon as bdo identified an individual or individuals who would participate in the bdo distressed_debt structure in early alm feldmans with mr straughan’s assistance engaged john hall director of legal and financial services ltd and provided him a power_of_attorney from saratov saratov poa acting ostensibly under the saratov poa mr hall formed erose llc erose organized in delaware to hold distressed foreign debt to be used in the bdo distressed_debt structure gramercy was the sole manager of erose from its inception around date mr hall again acting ostensibly as attorney for saratov under the saratov poa executed an assignment agreement that purported to assign to erose all of saratov’s rights to and interests in certain accounts_receivable in a total face_amount of rub big_number that were due from of its commercial customers saratov receivables the saratov receivables represented approximately of saratov’s total assets in book_value using rub usd exchange rates for we held an evidentiary hearing on date on respondent’s motion in limine challenging the authenticity of the saratov poa on date we denied respondent’s motion finding that the saratov poa was authentic however the ruling left open the issue of whether there was a valid and effective transfer of the subject accounts_receivable our opinion today renders this issue moot and erose’s form_1065 for reported this transfer as capital contributed of dollar_figure by saratov gramercy recorded this same amount as erose’s tax basis using the rub usd exchange rate of on the date of the contribution the saratov receivables had an equivalent face value of dollar_figure as of the date of contribution the saratov receivables were different from the type of emerging market debt securities in which the gemf would typically deal in that the saratov receivables were denominated in a local currency and much less liquid than many other instruments making it difficult to find a buyer at the time the debt instruments were also highly distressed and remained outstanding when they appeared to be overdue by at least four years moreover saratov did not appear to have any of the cross-border revenues or multinational assets that the gemf typically looked for to mitigate the impact of any currency devaluations finally the managed accounts did not have any concentration limits that gramercy imposed on the investments in the gemf to prohibit the gemf from investing too heavily in one particular region or specific type of asset gramercy assigned a fair_market_value of dollar_figure to the saratov receivables as of date around the time when saratov contributed the the average implicit rub usd exchange rate would be to receivables to erose the fair_market_value was determined by applying a percentage to the face_amount of each receivable before converting that amount to u s dollars using the then-applicable rub usd exchange rate on date gramercy purportedly became a member of erose by contributing to erose promissory notes issued by entities owned by gramercy’s principals and with stated values of dollar_figure the notes were unsecured and payable on demand and bore annual interest of as contemplated by the overall bdo distressed_debt structure saratov purportedly through mr hall and gramercy entered into a collection and servicing agency agreement on date collection agreement the collection agreement provided that saratov would collect service and manage the saratov receivables for erose under the collection agreement gramercy would be entitled to receive of the face value of the saratov receivables or rub big_number deductible before any payout to saratov any collection in excess of this deductible would be shared between gramercy and saratov in other words gramercy could receive up to of the face value of the saratov receivables if saratov collected of the receivables at their face value gramercy took no action other than entering into the collection agreement to collect on the saratov receivables no money was ever collected from these receivables james a cochran and richard perlman in james a cochran and richard perlman worked for practiceworks inc practiceworks as chief financial officer and chairman of the board respectively with the announcement in date of eastman kodak co ’s impending acquisition of practiceworks which was consummated in date messrs cochran and perlman expected large payouts from their severance packages and the sale of practiceworks shares and stock_options mr cochran projected a payout of approximately dollar_figure million and mr perlman projected approximately dollar_figure million in fact messrs cochran and perlman reported wages including severance and compensation on the sale of practiceworks stock_options of dollar_figure and dollar_figure respectively on their federal individual income_tax returns in or around date bdo met with messrs cochran and perlman to discuss investing in entities that managed distressed_debt instruments mr shanbrom was involved in the sale of the bdo distressed_debt structure to messrs cochran and perlman to facilitate messrs cochran’s and perlman’s participation in the promoted structure bdo referred the two to gramercy to become investors in gramercy’s managed accounts each of which would as noted above consist of a dad account investing in distressed russian accounts_receivable such as the saratov receivables and a managed emf account that mirrored and tracked the gemf after meeting with gramercy in or about date messrs cochran and perlman each entered into an investment management agreement ima with gramercy and signed letters of representations and warranties in connection with the ima transactions at issue mr cochran boyalik llc and buyuk buyuk transaction under his ima with gramercy mr cochran committed dollar_figure to5 gramercy for investment in instruments tracking those in which the gemf invested ie sovereign and corporate debt in emerging markets to compensate bdo for its devised structure and introduction to gramercy mr cochran who was earning an annual salary of dollar_figure at practiceworks at the time paid bdo a dollar_figure fee under a consulting agreement dated date that did not cover any other services bdo provided mr cochran paid bdo another this amount equal sec_15 of the ordinary_loss mr cochran claimed on his federal_income_tax return see infra which corroborates mr shanbrom’s testimony that a bdo-referred client was asked to invest in cash equal to of the anticipated tax loss dollar_figure fee under a tax audit representation agreement tara but he did not actually receive any services under the tara mr cochran also paid dollar_figure for a tax opinion from kilpatrick stockton on the buyuk transaction as well as dollar_figure to register akers to prepare a report on gramercy buyuk and boyalik llc boyalik which gramercy formed on date both llcs organized in delaware would become the llcs used in connection mr cochran’s managed account on date erose contributed certain portions of three of the saratov receivables buyuk receivables with a face value of rub big_number and a value of dollar_figure as of the date of contribution to boyalik in exchange for a interest in boyalik the buyuk receivables were debtor oao khimvolvokna aoot yershovsky kam ao orashayemoye date of origination face value in rub big_number big_number big_number as a step of the integrated bdo distressed_debt structure that contemplated the forming of a partnership for federal_income_tax purposes gramercy contributed to boyalik participation interests of in two promissory notes with a face value of dollar_figure gramercy notes or dollar_figure in exchange for a interest gramercy was named manager of boyalik for sourcing the buyuk receivables in connection with mr cochran’s participation in the bdo distressed_debt structure gramercy sought and received fees from bdo of dollar_figure using the rub usd exchange rates applicable on the alleged dates of origination boyalik recorded the total face value of the buyuk receivables as dollar_figure as noted above gramercy assigned the buyuk receivables a value of dollar_figure as of date gramercy arrived at this value first by determining that the buyuk receivables were worth of their face value and then by converting this amount to u s dollars using the prevailing rub usd exchange rate on date on date mr cochran paid erose dollar_figure for of erose’s interest in boyalik and replaced gramercy as sole manager on the same day boyalik contributed the buyuk receivables to buyuk for a interest in buyuk as an integral step in the bdo distressed_debt structure that contemplated the forming of a partnership for federal_income_tax purposes gramercy contributed its participation interests of in the gramercy notes to buyuk valued at dollar_figure for a interest in buyuk gramercy was the managing member of buyuk and mr cochran was not involved in buyuk’s daily operations for the investment management services gramercy charged mr cochran an annual fee equal to of the net asset value held in buyuk--in contrast to the the gemf typically charged its clients--and a performance fee equal to of any net profit--the same percentage the gemf charged its clients gramercy valued the buyuk receivables at dollar_figure as of date using the then-prevailing rub usd exchange rate on date mr cochran contributed dollar_figure in cash to boyalik and gramercy contributed dollar_figure in additional participation interests in the gramercy notes together with his cash payment for his interest in boyalik mr cochran’s cash contribution on november satisfied his commitment under the ima to invest dollar_figure with gramercy on the same day boyalik contributed the dollar_figure in cash received from mr cochran to buyuk and gramercy contributed additional participation interests in the gramercy notes to maintain it sec_1 interest gramercy invested the cash contribution in the managed emf account as noted above gramercy decided the buyuk receivables were worth of their face value applying the rub usd exchange rate of prevailing on date gramercy assigned the buyuk receivables a value of dollar_figure on date mr cochran contributed to boyalik his account held at goldman sachs that he and gramercy valued at dollar_figure million gramercy contributed additional participation interests in the gramercy notes to boyalik to maintain it sec_1 interest by the end of erose had a interest in boyalik mr cochran and gramercy held and interests respectively at bdo’s direction gramercy without considering whether it was a good time to sell the buyuk receivables caused buyuk to sell all of the buyuk receivables to gfs a gramercy entity for dollar_figure on date the face_amount of the buyuk receivables was dollar_figure on that date on its form_1065 buyuk reported an ordinary foreign_currency_gain of dollar_figure on the purported sale of the buyuk receivables computed as follows basis security khimvolokna dollar_figure yershovsky kam big_number big_number orashayemoye total big_number proceeds dollar_figure big_number big_number big_number fx gain dollar_figure big_number buyuk allocated of the foreign_currency_gain dollar_figure to boyalik and dollar_figure to gramercy boyalik in turn allocated of the foreign_currency_gain dollar_figure to mr cochran and dollar_figure to erose on the form_1065 buyuk also claimed an ordinary_loss deduction identified as sale of debt instruments - sec_988 of dollar_figure on the purported sale of the buyuk receivables computed as follows basis dollar_figure proceeds dollar_figure gain loss dollar_figure the buyuk receivables took a basis in the amount of the receivables’ face value using the rub usd exchange rate applicable on the alleged dates of origination buyuk allocated the entire loss deduction claimed to boyalik which in turn allocated of the claimed loss or dollar_figure to mr cochran and or dollar_figure to erose on their federal_income_tax return mr cochran and his then wife claimed an ordinary_loss deduction from boyalik of dollar_figure which effectively offset approximately of mr cochran’s reported wages for mr perlman bekoz llc rp capital partners llc and beyazit llc beyazit transaction the transaction relating to mr perlman is effectively identical to that involving mr cochran we will note only the main differences here under his ima with gramercy mr perlman was committed to invest dollar_figure with gramercy in instruments tracking the gemf mr perlman paid bdo dollar_figure with respect to his consulting agreement and dollar_figure with respect to his tara mr perlman also paid dollar_figure to kilpatrick stockton for a written tax opinion on the transaction and dollar_figure to register akers to prepare a report on gramercy the equivalents of buyuk and boyalik are beyazit llc beyazit and rp capital partners llc rp capital formerly bekoz llc respectively which gramercy also formed on the same day it formed buyuk and boyalik on date erose transferred certain saratov receivables to rp capital beyazit receivables with a face value of rub big_number in exchange for a interest in rp capital while gramercy contributed participation interests of in the gramercy notes or dollar_figure for a interest gramercy was named manager of rp capital as was the case with mr cochran’s managed account gramercy’s becoming a member of rp capital was again this commitment represent sec_15 of the ordinary_loss mr perlman claimed on his federal_income_tax return this second-level llc was first named bekoz llc on date bekoz llc was renamed rp capital partners llc after mr perlman for ease we will refer to this second level llc as rp capital throughout the opinion essential to the bdo distressed_debt structure in relation to mr perlman’s managed account the beyazit receivables which gramercy valued at dollar_figure as of date included the following debtor oao khimvolokna aoot saratovsky kame1 date of origination face value in rub big_number big_number the saratovsky kame receivable was not listed in the assignment agreement between saratov and erose or in the contribution agreement between erose and rp capital it was rather added as part of the beyazit receivables in date there is nothing in the record showing that an account receivable due from aoot saratovsky kame was transferred from saratov to erose or from erose to rp capital or from rp capital to beyazit while we have reservations over whether the saratovsky kame receivable was ever transferred from saratov to erose and from erose to rp capital our opinion today renders this issue moot on date mr perlman paid erose dollar_figure for of erose’s interest in rp capital and replaced gramercy as the sole manager on the same day rp capital contributed the beyazit receivables to beyazit for a interest in beyazit and gramercy contributed participation interests of in the gramercy notes for a interest gramercy valued the rp capital receivables at dollar_figure as of date using the prevailing rub usd exchange rate on that date gramercy was again the managing member of beyazit and charged mr perlman the same percentage fees that it charged mr cochran in connection with his respective account mr perlman was not involved in the daily operations of beyazit on date mr perlman contributed dollar_figure in cash to rp capital which rp capital immediately contributed to beyazit gramercy contributed additional participation interests in the gramercy notes mr perlman’s cash contribution on date together with his cash payment for his interest in rp capital satisfied his commitment under the ima to invest dollar_figure with gramercy on date mr perlman made an additional_contribution to rp capital that mr perlman and gramercy valued at dollar_figure and gramercy contributed additional promissory notes by the end of erose had a interest in rp capital mr perlman and gramercy had and interests in rp capital respectively in a manner similar to the sale of the buyuk receivables gramercy caused beyazit to sell the beyazit receivables without considering whether it was the right time to sell but rather did so at bdo’s direction on date approximately one month after beyazit acquired the khimvolokna receivable from the contribution consisted of mr perlman’s account held at goldman sachs and certain partnership_interest in ovenworks rp capital beyazit sold the receivable to gfs for dollar_figure in cash beyazit also sold the saratovsky kame receivable for dollar_figure although it is unclear from the record when beyazit sold it the face_amount of the beyazit receivables on date was dollar_figure on its form_1065 beyazit reported an ordinary_loss of dollar_figure from the sale of the beyazit receivables as follows description sale price basis ordinary gain loss sale of foreign_currency -- sec_988 sale of foreign_currency -- sec_988 sale of debt instruments -- sec_988 total dollar_figure dollar_figure dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number beyazit allocated of the sec_988 gain dollar_figure to rp capital and dollar_figure to gramercy beyazit allocated the entire sec_988 loss to rp capital rp capital in turn allocated of the sec_988 loss dollar_figure to mr perlman and dollar_figure to erose on their return mr perlman and his wife reported a foreign_currency_loss from flow-throughs of beyazit’s form_1065 listed date as the date of the sales of both receivables dollar_figure which effectively offset approximately of their reported wages for saratov’s redemption of its interest in erose throughout and mr hall on saratov’s behalf requested partial withdrawals of saratov’s interest in erose mr hall made these requests upon the instruction of mr straughan and the advice of gramercy saratov’s withdrawals which together amounted to approximately of what gramercy deemed to be the fair_market_value of the saratov receivables dollar_figure around date are shown in the following table request date total amount dollar_figure big_number big_number big_number big_number big_number big_number big_number big_number big_number according to mr cochran’s account statement dollar_figure was expected to be paid to saratov in connection with the buyuk receivables gramercy’s internal accounting spreadsheet also shows dollar_figure was expected to be paid to saratov in connection with the beyazit receivables messrs cochran’s and perlman’s payments to erose were sufficient to pay these amounts to saratov burden_of_proof opinion taxpayers generally bear the burden_of_proof in a partnership-level proceedings such as these see rule a 290_us_111 and petitioners conceded at trial that they have the burden_of_proof in these consolidated cases petitioners’ tax positions petitioners boyalik and rp capital claim that the initial transfer of the saratov receivables to erose a purported partnership for federal_income_tax purposes was a valid transfer effected through the saratov poa petitioners further claim erose’s subsequent transfers of the saratov receivables to them as well as their transfers of their respective receivables to buyuk and beyazit all of which purported to be partnerships for federal_income_tax purposes were also valid transfers because the valid transfers were contributions of property to the partnerships subject_to the subchapter_k nonrecognition rules petitioners argue the partnerships each took a transferred_basis of the receivables that they received see sec_721 and b in other words petitioners argue that saratov’s tax basis in the buyuk receivables--that is the receivables’ face_amount converted to u s dollars using the prevailing rub usd exchange rates on the receivables’ origination dates--eventually became buyuk’s tax basis in the same receivables which were transferred in a series of nonrecognition transactions from saratov to erose to boyalik and finally to buyuk similarly petitioners maintain that saratov’s tax basis in the beyazit receivables became beyazit’s tax basis in those receivables which were transferred also in a series of nonrecognition transactions from saratov to erose to rp capital and finally to beyazit according to petitioners upon disposition of the receivables buyuk and beyazit each recognized a loss equal to the difference between the amount of cash received and its tax basis in the receivables sold because the losses recognized were losses inherent in the receivables in the hands of saratov petitioners contend any such built-in_loss had to be allocated to the contributing_partner who had made the contribution in a nonrecognition_transaction sec_704 because buyuk had acquired the buyuk receivables from boyalik in a nonrecognition transaction buyuk had to allocate--and did allocate--the recognized_built-in_loss to boyalik see sec_1_704-3 b income_tax regs similarly beyzait had to and did allocate the built-in_loss recognized from the disposition of the beyazit receivables to rp capital id if a partner contributes property with inherent loss to a partnership and subsequently sells all or a portion of his or her partnership_interest the partnership must allocate any built-in_loss recognized from the disposition of the property to the successor of the partnership_interest in proportion to the partnership_interest transferred sec_1_704-3 income_tax regs consistent with this allocation rule boyalik allocated of the built-in_loss flowing from buyuk to mr cochran and rp capital allocated of the built-in_loss from beyazit to mr perlman respondent’s positions respondent does not dispute the manner in which the losses were allocated instead respondent attacks the entire series of transactions starting with saratov’s purported contribution of its receivables to erose respondent advances several alternative arguments to support his disallowance of the claimed losses they include saratov’s contribution of the receivables to erose and erose’s subsequent cash distributions to saratov in redemption of its interest in erose constituted a disguised sale of the receivables under sec_707 saratov’s contribution of the receivables to erose and erose’s subsequent sale of its interests in boyalik and rp capital to messrs cochran and perlman were in substance sales of the receivables to messrs cochran and perlman and prearranged steps designed to improperly shift tax losses to messrs cochran and perlman that should be collapsed under the step_transaction_doctrine and the transactions at issue lacked economic_substance on the record before us we sustain respondent’s disallowance of the claimed losses under all of the three alternative grounds expert reports we admitted a total of five expert reports and one expert rebuttal report at trial and the experts who wrote these reports testified and were cross-examined by opposing counsel see fed r evid rule g in one instance we directed two adverse experts who offered diametrically opposing opinions on the respondent has advanced a number of different arguments in support of the disallowance of the losses because we are able to reach our holding today solely on the basis of disguised sales substance over form and step transaction and the lack of economic_substance we express no opinions as to other theories respondent has argued on his brief same subject matter to testify concurrently in a manner described more fully below our discretion to accept or reject an expert’s analysis in whole or in part is broad crimi v commissioner tcmemo_2013_51 105_tcm_1330 citing cases we need not accept an expert’s opinion in its entirety and we are not bound by an expert’s opinion that is contrary to our own judgment id citing 86_tc_547 and 84_tc_722 to the extent that in reaching our decisions today we have relied on an expert’s opinions submitted to us we will summarize those opinions below burd report we recognize gene burd as an expert in russian law specifically russian currency control law commercial aspects of the russian civil law russian corporate law and russian business practices currency control system in russia the russian federation has had a very strict foreign_currency control regime since the disintegration of the soviet union in in the russian government adopted the currency control law of establishing the principles of the currency operation authority and functions of the agencies of the currency control rights and obligations of the residents and nonresidents and liability for violation of currency control legislation the law divided transactions into two types foreign_currency operations in the ordinary course of business and foreign_currency operations involving transfer of capital the law required all payments between residents and nonresidents to be made under the regulations established by the central bank of the russian federation cbrf all transactions in violation of the law were invalid and void the law also established authorized banks to act as the cbrf’s agents in carrying out certain specific functions under the currency control regime these authorized banks were responsible for monitoring and reviewing compliance with the currency control laws reviewing the merits of foreign_currency_transactions and supervising the correctness and completeness of accounting and reporting in connection with transactions involving foreign_currency the ultimate effect of the currency control regime was that no transaction involving foreign_currency could be legally carried out outside of the regulatory supervision and control of the cbrf its regional offices or the authorized banks mr burd opines that the transactions involving the saratov receivables would be considered transactions in connection with the movement of capital subject_to the restrictive currency control regime these include saratov’s having a membership interest in erose its redemption of its interest in erose and its payments to a nonresident that saratov was required to make under the collection agreement should it collect from the debtors thus the contemplated transactions would require special permissions in accordance with procedures established by the cbrf which included submission of a long list of documents and obtaining a positive opinion ie approval from the ministry of economy permissions were granted rarely and only on a discretionary basis mr burd further opines that the collection agreement would be virtually impossible to implement given the onerous currency control restrictions under the collection agreement gramercy was required to open a bank account into which saratov would deposit all collections on the receivables gramercy had two options to effect this scheme establishing a ruble-denominated bank account in russia or establishing an account in another currency outside russia to implement the first option gramercy would need to obtain special permission in accordance with instruction 93-i dated date on the procedure for the establishment by the authorized banks of the bank accounts for non-residents in the currency of russian federation and execution of transactions on these accounts instruction 93-i gramercy would essentially need to open a branch office in russia in order to meet the onerous filing_requirements and administrative procedures for doing so the entire process was time consuming and required assistance from local counsel to ensure compliance if gramercy were to open an account outside russia the payment scheme contemplated by the collection agreement would require saratov’s amending its contracts with its debtors so that the debtors would transfer any payments directly to gramercy’s offshore_account since intercompany payments in russia were customarily made only by direct bank transfers it would also require saratov to issue notices to its debtors informing them of the change_of_ownership of the receivables finally saratov’s debtors would also need to obtain special permissions before they could make any direct payments to an account established outside of russia the record does not show any of these steps were taken statute of limitation mr burd also questions whether gramercy had sufficient information to confirm that the statutory period of limitation had not run on the receivables and that the receivables remained collectible mr burd has reviewed documents that purported to substantiate the claim that the statutory period of limitation had not run on the assigned debts when saratov purportedly transferred the accounts_receivable to erose mr burd concludes that the documents would be insufficient to substantiate such a claim a general period of limitation under the russian civil code is three years the period begins to run when the creditor acquires the right to demand performance upon the expiration of any extended time for performance or upon the debtor’s admission of indebtedness admission of indebtedness during the statutory period would also restart the period of limitation a reconciliation report may serve as evidence of an admission of indebtedness although account reconciliation reports were provided to substantiate the claim that the receivables remained collectible when saratov transferred them to erose these reports in mr burd’s opinion did not provide the required details as to when the purportedly admitted debts were incurred when they were due and whether the entire obligation or only a portion had been admitted by the debtors without the required information the reconciliation reports were ineffective under the relevant russian laws to restart the period of limitation barter transactions during the mid-1990s when the saratov receivables arose there was a shortage of working_capital in russia resulting in frequent failure of companies to meet their current obligations many private and state-owned enterprises did not have sufficient cash in hand to make timely payments for the most necessary equipment and supplies or to meet payroll obligations salary payments were often delayed for months and sometimes employees would have to sell or exchange goods manufactured by their own companies which had paid these employees in_kind with the manufactured goods to sustain their livelihood the financial situation facing the electric power industry was rather bleak average salary arrears reached as high as months and in certain regions up to to months in only about of any outstanding obligations was met with cash payments and the rest was met with payments in_kind and ious barter transactions were time consuming and inefficient and did not always result in actual cash collections it was not unusual for parties to structure multiple transactions to obtain required goods or to convert products to cash the prevalence of barter and debt settlement transactions resulted in the creation of unofficial exchange markets with traders and brokers who connected various deals devaluation of russian ruble in the russian ruble collapsed on date the russian government devalued the ruble defaulted on domestic debt and declared a moratorium on payment to foreign creditors within a month the value of russian rubles fell from approximately rubles to u s dollar to rubles per dollar customary business practice around by the fiscal situation facing the russian electric power supply and distribution system improved significantly and problems with nonpayment or bartering in place of cash payments had been practically eliminated however legal and business due diligence remained a crucial part of engaging in any transactions with businesses in russia in the light of complex currency control regulations western companies would conduct extensive due diligence before doing any business in russia as a result proper documentation of any transaction was crucial and transaction documents were verified and reviewed in excruciating detail it would thus be highly unusual for there to be a complete absence of any pretransaction due diligence and failure to address basic requirements of the currency control regulations in documenting a particular transaction as was the case with the buyuk and beyazit transactions mr burd thus concludes that a western business like erose or gramercy would not engage in a transaction in russia with the expectation of profit without putting together a comprehensive document package that would be crucial in the eventual and successful repatriation of these profits from russia bean report we recognize professor bruce bean as an expert in russian business practices and business climate between date and date generally professor bean and mr burd agree on many points relating to the general environment in russia in the 1990s their discussions of the economic environment in russia barter transactions and customary business practices eg the importance of extensive due diligence and documentation of any transaction are largely consistent they disagree primarily in their conclusions professor bean points out that saratov had some leverage for collecting outstanding debts because its customers needed electricity and since saratov provided electricity to a region that was relatively prosperous and well endowed with oil_and_gas and productive agricultural land professor bean opines--while acknowledging he has no knowledge about saratov’s business itself--that the saratov receivables were an attractive investment especially in the light of the economic recovery and renewed optimism russia experienced in the early 2000s professor bean then concludes the transactions at issue were consistent with for-profit business transactions and procedures entered into in russia during the relevant period and that the documentation and procedures used in these transactions were consistent with the usual and customary business practices prevalent in russia at that time while we find professor bean to be a credible expert witness the conclusory nature of his opinions compels us to give them little weight in reaching our decision today first his conclusion that the saratov receivables would make an attractive investment was speculative and vague professor bean’s report fails to discuss with any specificity or detail how the obligors of these receivables would be able to meet their obligations under the accounts professor bean admits in his report that he has no information on saratov’s business and by extension its debtors thus we question how professor bean was able to conclude the saratov receivables would be a good investment without knowing anything about the specific debtors finally relying generally on the upward outlook of an economy at the regional or national level is not at least in these cases sufficient to show for-profit motive when as mr burd and scott calahan point out the countervailing factors would cause any prudent businessperson to pause before making the investment moreover professor bean fails to identify in his report how the documents and procedures used in the transactions at issue and which of these documents and procedures were consistent with the usual and customary business practices in russia at the time without any specifics it is difficult for us to glean from professor bean’s report what led him to his conclusion especially when we consider both mr burd’s and mr calahan’s detailed discussions of the type of extensive due diligence and documentation required in a transaction similar those in these cases in sum we give the bean report little evidentiary weight concurrent expert witness testimony--mr burd and professor bean following a pretrial conference and on the parties’ agreement the court directed mr burd and professor bean to testify concurrently the procedure was implemented in substantially the same way as in rovakat llc v commissioner tcmemo_2011_225 102_tcm_264 aff’d ___ fed appx ___ wl 3d cir date see also crimi v commissioner t c m cch pincite see generally michael r devitt a dip in the hot tub concurrent evidence techniques for expert witnesses in tax_court cases j tax’n discussing the concurrent testimony process more fully insofar as the conclusions reached in the burd report and the bean report are diametrically opposed to each other we cannot overstate the importance of concurrent witness testimony in these cases moreover through mr burd’s and professor bean’s concurrent testimony we were able to flesh out some of their reports’ conclusions reasonably reconcile the experts’ varying conclusions when possible and when reconciliation was impossible understand the basis for their disagreeing opinions and decide which opinion to rely on both professor bean and mr burd agree that doing business in russia would require extensive due diligence and strict compliance with documentation both experts further agree that several steps in the transactions such as the payment mechanism under the collection agreement would implicate the restrictive currency control laws calahan report we recognize scott calahan as an expert in asset management including the performance of due diligence and valuation of distressed debts saratov receivables and due diligence the calahan report’s observations on the statute of limitation applicable to the receivables at issue the russian economy and commercial culture in the mid 1990s to early 2000s and the type of due diligence an informed buyer would be expected to conduct in connection with similar transactions are consistent with those in the burd report and the bean report we will highlight only several issues the calahan report is able to supplement mr calahan observes that there was an absence of any credit analysis or adequate due diligence and documentation of the debtors of the saratov receivables he thus concludes gramercy and erose had made less than serious efforts to understand saratov’s debtors and how to collect the receivables mr calahan further opines this lackluster effort drastically reduced any ability to resell the saratov receivables to an informed and independent buyer as well as any expected market price upon any resale the calahan report lists over due diligence items that an informed buyer would expect to review in a similar transaction however only a handful of the due diligence items are found in the record having reviewed petitioners’ production during discovery and his own independent research mr calahan concludes that there remained the uncertainty among other uncertainties as to the existence of the companies identified as debtors and their ability to repay mr calahan also questions whether the small expected_return if any from the distressed receivables--assuming all the uncertainties were favorably resolved to the satisfaction of a fully capable u s investor--justified the work required and the cost to properly evaluate and document the acquisition of the distressed debts mr calahan also notes that not all uncertainties were likely to be favorably resolved finally mr calahan opines that the collection agreement was commercially unreasonable and would have likely inhibited any remittances to gramercy mr calahan notes that collection agreements rarely have a deductible before payment of any servicing fee mr calahan opines that it would be unlikely for saratov to be able to collect or more of the saratov receivables and that saratov would not have expected to often be paid any servicing fee as a result of the deductible in the collection agreement mr calahan further notes that saratov’s share of the upside on collection ie of any collection after the deductible was unreasonable since servicing and collection fees rarely exceed to of monthly collections valuation of the saratov receivables mr calahan has also appraised the saratov receivables the calahan report provides fair market values of the receivables on date ie around the time when saratov transferred the receivables to erose date ie when erose transferred the buyuk receivables and beyazit receivables to boyalik and rp capital respectively and date ie when mr cochran and mr perlman purchased from erose their member interests in boyalit and rp capital respectively mr calahan defines fair_market_value to be the price at which property would change hands between a willing u s buyer and a willing seller neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts for each of the three dates mr calahan provides valuations under two alternative assumptions saratov’s transfer of the saratov receivables was a valid and effective transfer and none of the uncertainties identified in the calahan report existed the uncertainties identified in the report did exist and had not been resolved that is assuming the transaction as it actually existed in general the longer the debtor has gone without paying down the debt the lower the price buyers of that debt are willing to pay obligations more than five years past due are generally regarded as having little to no value in appraising the saratov receivables mr calahan used the income_method of valuation and the market method of valuation the valuation methods and the valuations themselves are unrebutted and were not challenged at trial mr calahan then reconciled the results from these two approaches his reconciled values are approximately the midpoint between the income_method and market method values subject then to adjustment on the basis of his professional judgment the following tables show the valuation results income_method valuation assuming all uncertainties resolved satisfactorily debtor oao khimvolvokna aoot yershovsky kam ao orashayemoye aoot saratovsky kame dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure assuming uncertainties not resolved debtor oao khimvolvokna aoot yershovsky kam ao orashayemoye aoot saratovsky kame market method valuation assuming all uncertainties resolved satisfactorily debtor oao khimvolvokna aoot yershovsky kam ao orashayemoye aoot saratovsky kame dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure assuming uncertainties not resolved debtor oao khimvolvokna aoot yershovsky kam ao orashayemoye aoot saratovsky kame reconciled valuation assuming all uncertainties resolved satisfactorily debtor oao khimvolvokna aoot yershovsky kam ao orashayemoye aoot saratovsky kame dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure assuming uncertainties not resolved debtor oao khimvolvokna aoot yershovsky kam ao orashayemoye aoot saratovsky kame cragg report we recognize michael cragg as an expert in economics and finance specifically economic and financial analysis of cross-border transactions and international capital markets dr cragg first opines that the transactions at issue were outside the scope of gramercy’s normal business as the record shows before its dealings with bdo and in the saratov receivables gramercy invested primarily in sovereign and corporate securities denominated in u s dollars that were issued on the international capital markets and subject_to the laws of new york and the united kingdom in contrast the saratov receivables bore none of these earmarks of gramercy’s investment philosophy dr cragg finds the saratov receivables were subject_to unique risks such as currency risk and russian legal risk that were outside of gramercy’s typical focus dr cragg believes gramercy’s investment in the saratov receivables failed to follow its core investment strategies that were event and value driven in the context of distressed_debt an event-driven investment adviser would want to know whether the distressed_debt could be either restructured or repaid leading to significant profits in the future event-driven strategy is highly sensitive to timing relative to market events however gramercy appeared to allow bdo to dictate when it had to sell the saratov receivables as part of the bdo distressed_debt structure and the record does not otherwise show the decision to sell the receivables was prompted by any market events a value-oriented strategy involves selecting assets that are undervalued from a fundamental future cashflow perspective and require an analysis of the fundamental value of the assets dr cragg does not believe gramercy performed such an analysis and we note here mr calahan’s valuation of the receivables based on the income_method reveals the receivables had little to no fundamental value dr cragg further opines that no rational investor could have expected that collections would improve or produce a positive restructuring outcome as a result of the bdo distressed_debt structure or the collection agreement dr cragg observes that credit restructuring normally involves active renegotiation to influence the way in which a debtor repays its obligations this may involve liquidation of a debtor’s assets renegotiating the specific terms of a credit agreement or influencing the credit collection process in other ways however by entering into the collection agreement with saratov after acquiring the debts gramercy did nothing to further influence the collection process but instead passed the role of the collector back to saratov which had already demonstrated its inability to collect on the receivables throughout their lives some of them had been incurred as early as indeed the calahan report and the cragg report are in agreement in that saratov had little to no economic incentive to pursue the debtors and collect on the receivables as a result of the deductible in the collection agreement the record bolsters dr cragg’s conclusion since there is no evidence of any collections on or attempts to restructure the saratov receivables dr cragg finally opines that no economically rational taxpayer would have entered into the overall transactions involving the bdo distressed_debt structure at issue but for the tax benefits arising from the transactions dr cragg finds it highly improbable that the substantial costs of the transactions could be overcome by a combination of a large increase in the value of the ruble along with a massive improvement in collections on the buyuk receivables or the beyazit receivables on the other hand the anticipated magnitude of the claimed tax benefits guaranteed the buyuk transaction and the beyazit transaction would be individually profitable if those tax benefits were realized even if the values of the receivables dropped to zero in other words on an after-tax basis substantial profits were guaranteed while on a pretax basis losses were virtually certain at the time of the sales of the buyuk receivables and the beyazit receivables those receivables had face values of dollar_figure and dollar_figure respectively gramercy valued these two sets of receivables at dollar_figure buyuk receivables and dollar_figure beyazit receivables as of date ie approximately one to two months before the sales of the receivables gramercy determined both values by applying the same predetermined percentage ie taking into account petitioners’ limited upside potential under the collection agreement ie at the most of the collections and gramercy’s performance fee--assuming full collections on the receivables in a short time and using the highest rub usd exchange rate between the exchange rate on date and the exchange rate on date--the maximum values the buyuk receivables and the beyazit receivables could achieve were dollar_figure and dollar_figure respectively on the other hand the transaction costs in connection with the buyuk transaction and the beyazit transaction were dollar_figure and dollar_figure respectively broken down as follows buyuk transaction payee erose bdo bdo register akers kilpatrick stockton total type interest in boyalik consulting fee tax representation fee report on gramercy legal opinion amount dollar_figure big_number big_number big_number big_number big_number the total transaction cost dr cragg used in his report was dollar_figure we do not see how the lower transaction cost could have materially affected dr cragg’s eventual opinion beyazit transaction payee erose bdo bdo register akers kilpatrick stockton total type interest in boyalik consulting fee tax representation fee report on gramercy legal opinion amount dollar_figure big_number big_number big_number big_number big_number the transaction cost dr cragg used in his report was dollar_figure dr cragg testified that the actual transaction cost being lower did not materially affect his conclusion we agree in addition mr cochran and mr perlman each incurred an additional asset management fee that they would not have incurred but for the bdo distressed_debt structure dr cragg thus opines that without the anticipated tax benefits it was virtually impossible for the transactions to break even even if in the extremely unlikely event all of the buyuk receivables or beyazit receivables as the case may be were fully collected in contrast the after-tax profits were guaranteed in conclusion dr cragg finds that a rational investor could not have reasonably expected to make a nontax profit from either the buyuk transaction or the beyazit transaction given the required increase in receivable recovery rates and the required large appreciation in the ruble figure below shows a combination of collection rates and exchange rates that was necessary for the transactions to be profitable on a pretax basis figure spirikhin report we recognize alexei spirikhin as an expert in russian accounting generally and specifically in reviewing and analyzing russian financial statements mr spirikhin reviewed and analyzed saratov’s financial statements for the years ending date and he concludes the financial statements were prepared in accordance with russian accounting laws and russian accounting standards that all russian companies were required to follow in preparing financial statements under russian accounting principles saratov had to reflect on its financial statements ownership in all domestic and foreign entities irrespective of the size of the investment for saratov did not report any change to its long-term financial investments including investments in subsidiaries affiliates or associate companies and other organizations on the basis of this observation mr spirikhin opines that saratov did not make any capital investments to any overseas subsidiary or more specifically saratov did not establish erose as a subsidiary or invest in it mr spirikhin further opined at trial that the financial statements do not reveal any evidence of any return on an investment including saratov’s receiving a distribution in redemption of any purported interest in erose which would have been reported on saratov’s financial statements had it actually occurred further the khimvolokna receivables were specifically listed in the financial statements as one of the major debtors however the khimvolokna receivables were not similarly listed in the financial statements for the year ending date mr spirikhin also notes that in there was a sizable bad_debt writeoff but is uncertain as to whether the saratov receivables were among the debts that were written off mr spirikhin opines that one possibility was that saratov sold the receivables for less than their face value in and wrote off the losses then mr spirikhin also reviewed at trial saratov’s account reconciliation reports dated date for khimvolokna orashayemoye and yershovsky kam which are in evidence these reports are not invoices but they are essential to the preparation of a company’s financial statements in that they represent the amounts the creditor and the debtor believe to be outstanding at a given time on the account reconciliation reports dated date saratov recorded outstanding receivables due from khimvolokna orashayemoye and yershovsky kam in amounts equal to or greater than the amounts purportedly transferred to erose on the basis of these observations mr spirikhin opines that saratov would not have created these reports if it had transferred the receivables to erose and thus appeared to own the receivables at the end of finally we note that professor bean opined during the course of his concurrent testimony that it was possible that saratov believed it still owned the receivables in and kept them on its books despite having transferred them to another entity for an interest in that entity professor bean speculated that saratov might think that because nobody knew about the transaction it wanted to wait and see whether the transaction would actually succeed before reporting the transaction on its financial statements disallowance of the claimed loss deductions disguised sales under sec_707 generally a partner may contribute property to a partnership for an interest in the partnership tax free sec_721 likewise a partner may receive tax-free distributions from the partnership of previously taxed capital sec_731 however the disguised sales rule under sec_707 treats a contribution of property and a related distribution from the partnership as a taxable sale when their combined effect is to allow the contributing_partner to dispose_of the contributed_property for money or other consideration see sec_1_707-3 income_tax regs this is the case when the distribution would not have been made but for the initial contribution of property and in cases involving nonsimultaneous transfers the distribution is not dependent on the entrepreneurial risks of partnership operations sec_1_707-3 income_tax regs in other words with nonsimultaneous transfers if the contributing partner’s capital is at risk in the partnership for a sufficient time the nonrecognition rules apply conversely if contributed capital is not at risk and the subsequent distribution bears no relationship to the entrepreneurial risks of the partnership’s operations the transfers are properly viewed together as a sale transfers treated as sales under the disguised sales rule are treated as sales for all purposes under the code sec_1_707-3 income_tax regs the sale is considered to take place on the date the partnership is considered the owner of the property under general principles of federal tax law id for nonsimultaneous transfers the contributing_partner is deemed to have exchanged the contributed_property for the partnership’s obligation to make a subsequent transfer or transfers of money or other consideration id see generally sec_453 installment_sale time_value_of_money rules sec_1_707-3 example income_tax regs under the regulations reciprocal transfers between the partner and the partnership made within two years give rise to a rebuttable_presumption that the transfers constitute a sale of the transferred property to the partnership sec_1_707-3 income_tax regs the taxpayer may rebut the presumption by carrying his or her burden to show facts and circumstances that clearly establish we fully expect the parties to apply during rule_155_computations the rules of installment_sales under sec_453 and time_value_of_money under sec_1274 as is the case in the example in the regulations that the transfers do not constitute a sale id emphasis added see superior trading llc v commissioner tcmemo_2012_110 103_tcm_1604 aff’d 728_f3d_676 7th cir the regulations further provide such facts and circumstances that may tend to prove the existence of a sale sec_1_707-3 income_tax regs in and following saratov’s transfer of the saratov receivables to erose saratov received cash distributions from erose of at least dollar_figure million or approximately of the saratov receivables’ value determined on the date the receivables were transferred to erose ie date following mr cochran’s and mr perlman’s purchases of erose’s interests in boyalik and rp capital respectively in date erose made cash distributions to saratov of dollar_figure in date hence under the disguised sales regulations the presumption of a sale attaches unless petitioners can clearly establish the transfers were not in fact sales of the receivables erose is considered to have bought the buyuk and beyazit receivables from saratov and taken cost bases in the cash distributions were partly funded by mr cochran’s and mr perlman’s payments for their purchases of erose’s interests in the llcs since there is nothing in the record showing erose had other cash income to otherwise enable the cash distributions them of dollar_figure and dollar_figure respectively subject_to any adjustments under sec_453 and dollar_figure the record in these cases also compels the conclusion that the transfers are properly characterized as a sale under the disguised sales regulations first it is clear that erose’s cash distributions to saratov would not have been made but for saratov’s transfer of the receivables see sec_1_707-3 income_tax regs indeed the cash distributions were entirely funded by money provided by individuals such as messrs cochran and perlman who would not have bought into the llcs but for the receivables’ having the desired characteristics and tax_attributes what is more saratov was initially concerned about the bdo distressed_debt structure but eventually agreed to participate in it after being assured that it would receive cash for the receivables sometime after the initial these were the amounts erose had agreed to pay and paid saratov for the receivables respondent appears to claim that erose took cost bases in the receivables equal to what messrs cochran and perlman each paid for their interests in boyalik and rp capital respectively but because the partnership is considered the purchaser of the saratov receivables under the disguised sales rule the reference point is what erose paid in essence and putting aside any currency fluctuations between date and date messrs cochran and perlman paid erose more than what erose paid saratov for the buyuk and beyazit receivables -- ie erose charged messrs cochran and perlman for the receivables pincite of the face_amount while paid saratov only --and erose pocketed the difference but this does not change the fact that erose’s tax bases must be its costs we expect that during rule_155_computations these lower bases will result in higher gains from the sales of the receivables to gfs contribution in other words the contribution of the receivables and the subsequent cash distributions were reciprocal transfers further the record shows the saratov receivables were not at risk in erose’s hands and erose’s cash transfers to saratov bore no relationship to the entrepreneurial risks of the partnership’s operations see sec_1_707-3 income_tax regs petitioners argue that without saratov and gramercy’s joint efforts to operate erose in a manner to monetize the receivables there would have been no cash available for distributions as petitioners see it there were three ways for the so-called joint efforts to make a profit on the receivables collecting on the receivables restructuring the receivables for a more favorable collection outcome and selling the receivables to someone else however under the bdo distressed_debt structure the saratov-gramercy partnership could not have monetized the receivables in any of these three ways soon after saratov transferred the receivables to erose gramercy as erose’s manager outsourced the task of collection back to saratov and did nothing else to collect on the receivables or influence their collection before entering into the collection agreement saratov had never been able to collect from its debtors and the arrangement under the collection agreement did nothing to incentivize saratov to work harder to pursue its debtors to the contrary the economic arrangement contemplated by the overall structure ensured that saratov would receive less than what it could collect if anything on the receivables if saratov could successfully pursue its debtors to collect anything without gramercy’s assistance saratov from an economic perspective would not have entered into the arrangement and agreed to turn over a part of its collection to gramercy which offered no help at all but because saratov did join with gramercy in erose while retaining its role as the sole collector pursuing the receivables the parties could not have legitimately anticipated that saratov and by extension erose would collect even one ruble from the debtors indeed other aspects of the record also support our finding that neither saratov nor gramercy expected successful collection gramercy’s lackluster efforts to document and perform due diligence on the debtors and the collectibility of the receivables show gramercy was never serious about collecting further there is no credible_evidence that indicates either saratov or gramercy attempted to comply or documented its compliance with the stringent foreign_currency control regime in russia the payment scheme under the collection agreement likewise made any transfer of funds to erose virtually impossible without overcoming a plethora of regulatory hurdles in russia in addition mr calahan’s unrefuted valuation of the receivables shows they had little to no value when viewed in the light of mr calahan’s valuation the deductible imposed by the collection agreement eliminated any incentives for saratov to pursue its debtors finally no collection was ever in fact made together the record shows saratov did not join gramercy to operate erose to collect on the receivables thus any subsequent cash distribution by erose cannot be said to depend on the entrepreneurial risks of the partnership’s operations in the context of collection the above analysis also informs our next finding that saratov and gramercy likewise did not expect that their joint efforts could effect favorable restructuring outcomes for the receivables we first note that mr calahan’s valuation of the receivables as nearly worthless makes incredible any claim that it was realistically possible to restructure the debts further as dr cragg points out in his report debt restructuring requires active renegotiation to influence how the debtor may repay its debts for example an increased interest rate in exchange for a longer term of repayment coupled with reduced periodic_payments immediate payment in satisfaction of the debt in exchange for substantial discount of the even the valuation agreed upon by saratov and gramercy strongly suggests that the parties did not believe any collection was likely to surpass the threshold thus we agree with mr calahan and dr cragg that saratov had no economic incentive to spend any efforts to collect on the receivables debt’s balance or threats of liquidation of debtor’s assets in foreclosure and so forth in most cases the level of pressure and influence the collector may bring to bear is critical but here saratov continued to be the sole collector and had shown that it could exert little influence on its debtors meanwhile gramercy did not use any specialized skills particular expertise or commercial or political leverage to pressure the obligors of the receivables to renegotiate the debts for a more positive collection outcome in fact any skills or expertise gramercy might have had in restructuring distressed securities related to restructuring sovereign or corporate debts not consumer receivables that lacked the kinds of socioeconomic and commercial characteristics inherent in sovereign or corporate debts that lent themselves to restructuring had saratov been able to restructure the receivables with its debtors without gramercy’s help it would have been unnecessary for saratov to enter into the type of arrangement that it did with gramercy but the fact that saratov did enter into such an arrangement suggests that neither saratov nor gramercy anticipated any successful restructuring would result from joining together under erose thus in the context of restructuring erose’s cash distributions to saratov had nothing to do with the entrepreneurial risks of the partnership’s operations since the partnership never endeavored to restructure the receivables in the first place petitioners’ claim that erose could monetize the receivables by operating to sell the receivables to someone else is likewise not supported by the record it is true that erose turned the receivables into cash by contributing the receivables to a lower tiered llc and then selling its interest in the llc to tax-sensitive individuals like messrs cochran and perlman however it was not erose’s ingenuity or gramercy’s entrepreneurial acumen that identified the individual purchasers and facilitated the sales in fact it had always been part of the integral plan even before saratov transferred its receivables to erose that bdo would be responsible for identifying prospective purchasers and referring them to gramercy gramercy’s sole role was sourcing distressed foreign accounts_receivable that met bdo’s criteria and becoming a partner of the llc to facilitate the implementation of bdo’s scheme erose and gramercy simply had nothing to do with finding buyers of membership interests in llcs that held saratov’s receivables it is thus clear that bdo was the one that pledged the funding of the cash distributions to saratov by promising to find individuals like messrs cochran and perlman to buy into the bdo distressed_debt structure simply put saratov’s receipt of cash distributions from erose was not dependent on any entrepreneurial risks of erose’s operations further the money saratov received from erose had never been subject_to any entrepreneurial risks of erose’s operations because bdo and gramercy had already agreed before the transfer of the saratov receivables to pay saratov about of the face_amount of any receivables that bdo was able to sell through the structure upon the transfer of the saratov receivables saratov and gramercy agreed saratov’s interest in erose had a value of approximately dollar_figure million as part of the bdo distressed_debt structure erose consistently sold to an individual or a group of individual sec_90 of its interest in an llc that held some portion of the saratov receivables thus in the aggregate erose sold its membership interests in all of the llcs involved for approximately dollar_figure million dollar_figure million which also equaled of the face_amount of the saratov receivables using the exchange rate on date erose in fact made cash payments of approximately dollar_figure million to saratov within two years with respect to each bundle of receivables mr cochran’s account statement shows that rub big_number divided by multiplied by dollar_figure million dollar_figure or of the buyuk receivables’ face_amount was expected to be paid to saratov in connection with the buyuk receivables similarly gramercy’s internal accounting spreadsheet shows that dollar_figure or of the beyazit receivables’ face_amount was expected to be paid to saratov in connection with the beyazit receivables mr cochran’s and mr perlman’s cash payments were each sufficient to cover the promised payments to saratov and erose paid saratov the agreed amounts when viewing all these pieces together we are convinced that the money saratov received was a fixed price negotiated between the parties before saratov allegedly transferred the accounts_receivable to erose and the cash payments were thus not subject_to any entrepreneurial risks of erose’s partnership operations finally saratov’s economic position did not change and thus saratov did not bear any risk by transferring the receivables to erose because the receivables were almost worthless saratov did not actually face any risks by placing them with erose--the worst that could have happened was the highly the face_amount of the buyuk receivables was rub big_number converted to u s dollars using the rub usd exchange rate of on date the face_amount was dollar_figure the face amounts of the beyazit receivables was rub big_number converted to u s dollars using the rub usd exchange rate of it was dollar_figure unlikely event that bdo would fail to find buyers and saratov would be left with an interest in an llc holding receivables that had always been worthless moreover relying on mr spirikhin’s expert opinion and mr bean’s testimony we believe that from saratov’s accounting perspective it did not actually give up the receivables until it received cash from erose in this would explain why the receivables appeared to remain on saratov’s books for all in all we find that the cash payments to saratov did not result from erose’s operations we further find there was little risk that saratov would not receive the promised cash payments because bdo had assured saratov that it would make cash payments equal to of the receivables’ face_amount which it would fund using payments from individuals who agreed to participate in its tax sheltering scheme the assurance was virtually certain to materialize because the potential after-tax profits the structure was expected to generate far exceeded what bdo promised to pay saratov making it highly unlikely that bdo would fail in finding tax-motivated investorsdollar_figure for mr cochran the expected_return in the form of an ordinary tax loss of approximately dollar_figure million on his cash investment of dollar_figure under his ima wa sec_666 for mr perlman the expected_return dollar_figure million on his cash investment dollar_figure million was also this clever and yet contrived arithmetic once unmasked reveals the intent of bdo’s scheme to lure its investors with and only with lucrative tax losses against the two-year presumption and the overwhelming evidence showing that the cash payments to saratov were not dependent on the entrepreneurial risks of partnership operations petitioners seek to rebut the presumption and persuade us the transfers were not a sale by attempting to show that the facts and circumstances listed in the regulations were clearly absent in these cases see eg sec_1_707-3 example iii income_tax regs lack of sources to fund distribution may be evidence of transfer not part of sale petitioners rely heavily on the fact that saratov did not have any legally enforceable right to a subsequent distribution when it transferred the receivables see sec_1_707-3 income_tax regs and that no one at that time was obligated to contribute cash or liquid the regulations state that the listed facts and circumstances may tend to prove the existence of a sale but are otherwise silent on whether the converse is true--namely whether their absence may prove that reciprocal transfers are not part of a sale see sec_1_707-3 income_tax regs some commentators have suggested that example in the regulations appears to indicate that a taxpayer may rely on the absence of these factors to show a sale has not occurred see laura e cunningham noël b cunningham the logic of subchapter_k a conceptual guide to the taxation of partnerships 4th ed william s mckee et al federal taxation of partnerships and partners para b pincite 4th ed this is the argument petitioners make in their brief because we disagree with petitioners’ factual allegation underlying their argument ie there is clearly an absence of any of the factors from the transactions at issue we need not address the premise of their argument ie a showing of the absence of any of the factors may tend to prove that related transfers are not part of a sale assets to effect any subsequent cash contribution see sec_1_707-3 income_tax regs but the crucial and common theme to be gleaned from the facts and circumstances in the regulations and their examples is that if at the time of the earlier transfer it was reasonably certain that the transferor would receive cash or other consideration for the property transferred of an amount determinable with reasonably certainty the related transfers will be reclassified as a sale see sec_1_707-3 income_tax regs our findings today show that saratov was promised payments equal to of the face_amount of the saratov receivables-- which were nearly worthless at the time of the transfer--upon bdo’s successfully finding investors to pay for the receivables to be used in the structure neither saratov nor bdo showed any doubt that bdo could find such investors especially when we consider the fact that saratov wanted only cash for the receivables and was willing to part with the receivables for the time being without being paid at once after bdo provided assurances that it could obtain the cash to fund the promised distributions the assurances were backed and secured_by the reasonable certainty that bdo would be able to raise dollar_figure million with little difficulty in a short time from investors who hoped to avail themselves of tens of millions of dollars of tax losses through bdo’s structure thus we cannot agree with petitioners that the facts and circumstances in these cases clearly establish the transfers were not a sale in sum we conclude that saratov’s transfer of the saratov receivables to erose and erose’s cash payments constituted an installment_sale of the receivables as a result erose’s bases in the buyuk and beyazit receivables were cost bases to be computed under rule see supra note substance over form step transaction our disguised sales analysis naturally suggests the possible application of the substance over form and step transaction doctrines to permit the true nature of a transaction to be disguised by mere formalisms which exist solely to alter tax_liabilities would seriously impair the effective administration of the tax policies of congress 324_us_331 for the reasons outlined in our disguised sales analysis the true substance of the overall transaction was saratov’s disposing of the saratov receivables for cash consideration when negotiating with saratov mr helie understood that saratov was ultimately interested in cash for its receivables the amount of cash saratov in reaching our decision today by recharacterizing the purported contribution and distributions as a sale in disguise we do not intend to say one way or another whether erose was a bona_fide partnership for federal_income_tax purposes would receive was already determined at the time of the initial transfer it was virtually certain from the outset that bdo would be able to collect sufficient money from buyers interested in the tax_attributes of the receivables to fund the promised consideration to saratov thus the overall transaction was in substance an installment_sale of the receivables under the step_transaction_doctrine we may collapse a series of formal steps into a single transaction if the intervening steps are so interdependent that the legal relations created by one step would have been fruitless without completion of the later series of steps interdependence test 137_tc_70 citing 88_tc_1415 aff’d 728_f3d_676 7th cir the formally separate steps are prearranged components of a composite transaction intended from the outset to arrive at a specific end result end result test id pincite citing 190_f3d_1165 10th cir or at the time of taking the first step there was a binding commitment to undertake the subsequent steps binding_commitment_test id pincite citing 391_us_83 the end result test clearly applies here because everyone involved in the transaction had always expected from the outset of the transaction that saratov would be paid a predetermined amount once bdo was able to find individuals like messrs cochran and perlman to participate in its distressed_debt structure our disguised sales analysis supports this conclusion indeed the record shows many of the steps taken in the overall transaction were steps that the bdo distressed_debt structure deliberately choreographed to produce the promised tax losses see superior trading llc v commissioner t c pincite the interdependence test is equally applicable here in applying this test we inquire whether the intermediate steps accomplished valid and independent economic or business purposes id petitioners would want us to believe that each intermediate step had its own economic significance and served valid business purposes the record however simply does not support such a claim saratov’s placing the receivables with erose served only one purpose to facilitate the bdo distressed_debt structure in exchange for a predetermined amount of cash saratov did not bear any risks when it transferred the receivables to erose because they were almost worthless as to messrs cochran and perlman if their goal was to invest in foreign distressed debts they could have purchased the debts directly messrs cochran and perlman claim they wanted to avail themselves of the liability protection provided by an llc because they were concerned about exposure to some unspecified risks resulting from their investment in the russian receivables however they have failed to articulate with particularity the risks to which they feared they would be exposed further they could enjoy liability protection by either transferring any distressed debts that they acquired individually to an llc or forming a single-member llc for purposes of acquiring distressed debts--in either case bdo’s highly structured scheme involving multitiered partnerships would not be necessary to achieve the purported business_purpose and bore no independent economic significance finally the only purpose for the eventual sales of the buyuk and beyazit receivables to gfs was to trigger the inherent tax losses rather than for any economic gain because the sales made at bdo’s direction were simply a shuffling of the distressed receivables among the accounts gramercy managed for other individuals put another way the sales made no economic sense because depending on the investment manager’s outlook he or she would inevitably undermine and harm the position of either the buyer or the seller both of whom were his her clients for these reasons we can easily conclude that the various intermediate steps engineered for the bdo distressed_debt structure are properly collapsed into a single transaction the transaction is simply saratov’s sale of the receivables to erose for a portion of what erose was then able to package as membership interests in certain llcs and to resell to messrs cochran and perlman economic_substance as we have indicated earlier the overall transaction engendered by the bdo distressed_debt structure also lacked economic_substance although taxpayers may generally structure their business transactions in a manner to maximize their after-tax profits ie producing the least amount of tax_liability see 552_us_421 n citing 293_us_465 courts may nonetheless disregard transactions that as a whole do not have economic_substance compelled by business realities and separate and apart from the resulting tax benefits 435_us_561 933_f2d_143 2d cir aff’g tcmemo_1989_ see also acm p’ship v commissioner tcmemo_1997_115 73_tcm_2189 aff’d in part rev’d in part on other grounds as to the binding_commitment_test we find it inapplicable here because there was no express binding commitment to undertake the various transactions in the overall structure f 3d 3d cir the economic_substance_doctrine requires a searching analysis that turns on the ‘objective economic_substance of the transactions’ and the ‘subjective business motivation’ behind them 157_f3d_231 pincite quoting 909_f2d_1360 9th cir aff’g tcmemo_1987_628 and aff’g moore v commissioner tcmemo_1987_626 and aff’g sturm v commissioner tcmemo_1987_625 and aff’g in part rev’g in part 89_tc_1229 117_tc_328 aff’d 320_f3d_282 2d cir see also 752_f2d_89 4th cir aff’g in part rev’g in part 81_tc_184 the various courts of appeals disagree as to the appropriate relationship between the objective and subjective prongs of the economic_substance inquiry see john hancock life ins co u s a v commissioner t c ___ ___ slip op pincite date citing cases from different circuits taking different approaches to objective and subjective tests cases from the court_of_appeals for the second circuit to which these cases are appealable can be construed as at trial the parties stipulated that these cases are appealable to the court_of_appeals for the second circuit applying the two tests disjunctively conjunctively or according to the facts and circumstances without adhering to a rigid two-step analysis see generally 703_f3d_46 2d cir noting that issue of how to apply two tests is not settled in the circuit but it appears courts in the second circuit tend to apply a flexible and fluid approach see 694_fsupp2d_259 s d n y 330_fsupp2d_122 d conn aff’d 150_fedappx_40 2d cir see also 933_f2d_143 irrespective of how the court_of_appeals treats the relationship between the two tests our fluid and unitary analysis of the two prongs shows no economic_substance in the transactions at issue because petitioners have failed to establish with credible_evidence that there was ever any realistic possibility of making a pretax profit on the buyuk and beyazit receivables or that they had any valid business_purpose other than acquiring the large tax benefits by entering into the transactions consequently we must disregard the transactions for federal_income_tax purposes and sustain respondent’s disallowance of the losses claimed objective test a transaction generally has economic_substance for federal_income_tax purposes if the transaction offers a reasonable opportunity for pretax profit gilman v commissioner tcmemo_1989_684 58_tcm_1075 aff’d 933_f2d_143 2d cir rovakat llc v commissioner t c m cch pincite citing 87_tc_1471 a reasonable opportunity for pretax profit is present only if there was a legitimate expectation that the nontax benefits would be at least commensurate with the transaction costs acm p’ship v commissioner t c m cch pincite in some instances tax losses that do not correspond to any actual economic losses do not constitute the type of ‘bona fide’ losses that are deductible for federal tax purposes acm p’ship v commissioner f 3d pincite we agree with dr cragg’s conclusion that there was no realistic possibility for the transactions at issue to break even absent any_tax benefits dr cragg found the buyuk and beyazit receivables to have maximum values of dollar_figure and dollar_figure respectively however the transaction costs associated with the buyuk and beyazit transactions were dollar_figure and dollar_figure respectively without including the asset management fees gramercy charged in connection with the bdo distressed_debt structure thus it was virtually impossible for the transactions to turn a profit even in the highly unlikely event the parties could collect the full face amounts of the receivables gramercy valued the receivables pincite of their face_amount thus this valuation implicitly acknowledged that either collection within a short time beyond was unrealistic and in fact impossible or collection beyond was possible but costs associated with collection would yield a net value not much more than of the receivables’ face_amount in either case the parties could not have contemplated that collection would yield a net value much more than and as we discussed above the manner in which the collection agreement was structured provided no incentive for saratov to expend any efforts to collect on the receivables thus substantial favorable movement in the rub usd exchange rate was necessary to make up any shortfall in their values resulting from uncollectibility figure shows the combination of short-term collection rates and exchange rate movement necessary to break even in the transactions over a long period however the minimum required collection rates would likely have to be even higher as a result of increased transaction costs associated with the time_value_of_money and the market cost of riskdollar_figure mr calahan’s unrefuted valuations are much lower but absent any extraordinary events the actual collectibility would likely be lower as the accounts_receivable remained in default and outstanding for a longer period to generate collection at those rates in the short term a rational investor would expect from an economic perspective that gramercy would have some competitive advantage in collecting these types of debts and be aggressively pursuing the debtors in fact gramercy did not have such a competitive advantage as its expertise and skills lay in sovereign and corporate debt instruments and not consumer receivables nor had gramercy expended any efforts not to mention extraordinary efforts to pursue the debtors to improve collection or encourage positive restructuring outcomes indeed neither saratov nor gramercy ever collected on the receivables moreover substantial appreciation in the ruble was a necessary condition for the transactions to turn a profit in all cases but the record shows no credible_evidence that any of the participants in the transactions expected or even contemplated that this would occur petitioners argue that there were ways other than collection for the transactions to be profitable restructuring the receivables selling the receivables and speculating on the ruble petitioners also argue that mr cochran’s and mr perlman’s investments in the managed emf accounts ie the second component the managed account that tracked the gemf gave the transactions economic_substance we disagree the prospect of any positive restructuring of defaulted debts is inextricably tied to the debts’ collectibility and the debtors’ business fundamentals as we noted weak collection prospects render any favorable restructuring difficult because the substantial transaction costs exceeded the buyuk and beyazit receivables’ values determined on the basis of full collection any restructuring had to do better than what a combination of collection rates and favorable exchange rate movement could yield in order to cover costs and generate profits generally as an economic and commercial matter it is difficult for a holder of highly distressed long overdue debts to restructure the debts and to perform better than collection on a dollar-to-dollar basis ie if current collectibility is dollar_figure the net present_value of the restructured debt discounted for any market risks will unlikely exceed dollar_figure absent strong fundamentals in the debts or the debtor’s business particularly in these cases we cannot see how a rational investor could have reasonably expected a favorable restructuring outcome given our conclusion that the receivables had little value rendering collection unlikely and the lack of any evidence of strong fundamentals in the debts or the debtors further as we have said elsewhere no one actually expended efforts to induce the debtors to negotiate to restructure the accounts_receivable and gramercy was simply sitting on the sidelines and failed to be proactively involved in any restructuring process thus we find that a rational investor could not have legitimately expected positive restructuring outcomes on these facts as to speculation on the ruble collection would remain in the equation in most cases figure shows that appreciation in the ruble was necessary to generate any profits assuming collection even if the ruble appreciated by the collection rate would still have to be approximately and assuming no collections and relying on the assumption that the net value of was commercially reasonable there had to be an appreciation in the ruble for the transactions to break even there is no credible_evidence that there was any realistic expectation that the ruble would appreciate in that magnitude because it could not have been reasonably expected that positive economic outcomes could result from collection restructuring or currency speculation no economically rational investor would have bought the receivables from the partnerships unless that investor were also tax motivated thus petitioners cannot claim as a matter of law that they could have legitimately expected profits from the transactions by selling the receivables to someone else we must also reject petitioners’ suggestion that our economic_substance analysis should take into account mr cochran’s and mr perlman’s investments in the managed emf accounts the investments in the managed emf accounts were economically independent from the investments in the dad accounts--that is messrs cochran and perlman could invest in the gemf directly without investing in the dad accounts nor did the managed emf accounts have any impact on the fundamental economics of the saratov receivables or serve as a hedge against the dad accounts when the dad accounts were on a pretax basis sure losing investments to begin with it would be a far cry from the essence of the doctrine_of economic_substance if we allowed a taxpayer to instill substance in an economically nonviable transaction by bundling it with an economically unrelated transaction bearing some stuff of substance o ne economically beneficial component of a much larger complex transaction does not impart further messrs cochran and perlman could have invested directly in the gemf without incurring the additional asset management fee that provided no incremental benefit to them because gramercy’s investment strategies as to the managed emf accounts were identical to those employed on the gemf hence the additional fee can only be attributed to the dad account component which our opinion today explains did not bear any valid nontax business_purpose or pretax profit potential as dr cragg correctly points out in his report we can also ignore mr cochran’s contribution of his goldman sachs account to boyalik and mr perlman’s contribution of his goldman sachs account and partnership_interest in ovenworks to rp capital these assets were used to increase mr cochran’s and mr perlman’s outside bases so that they could take the tax losses when buyuk and beyazit sold the receivables and appeared to sit in the higher tiered llcs walled off from the managed accounts thus these assets did not affect the fundamental pretax economics of the transactions economic_substance to the larger transaction wfc holdings corp v united_states f 3d pincite at the end the transactions here yielded only nominal economic gains and thus the claimed tax losses bore no relationship to the economic reality of the transactions there was never a legitimate or reasonable expectation of pretax profits in these cases we thus find that the transactions lacked objective economic_substance subjective test the second part of the economic_substance analysis inquires whether a taxpayer has subjective nontax reasons to enter into a transaction and whether he or she has a legitimate profit_motive for doing so rice’s toyota world inc v commissioner f 2d pincite whether a transaction is conducted with a subjective business_purpose depends on a number of subfactors including whether the taxpayer had a valid nontax business_purpose for entering into the transaction the transaction was negotiated and entered into at arm’s length the taxpayer performed due diligence regarding the commercial viability and market risks of the transaction in the case of a partnership the partners intended to join together for the present conduct of an undertaking or enterprise and the transaction was marketed as a tax_shelter in which the purported tax benefit significantly exceeded the taxpayer’s actual investment rovakat v commissioner t c m cch pincite these subfactors are not exclusive and no one subfactor is controlling id as we discussed earlier petitioners claim there were four ways for the transactions to be profitable we have already rejected petitioners’ claims and we need not repeat them here it suffices to say that petitioners have not shown any valid business_purpose for engaging in the transactions but for the expected tax losses inherent in the receivables no part of the overall transaction was rationally related to a useful nontax purpose that is plausible in light of the taxpayer’s conduct and useful in light of the taxpayer’s economic situation and intentions all evaluated in accordance with commercial practices in the relevant industry acm p’ship v commissioner t c m cch pincite nor was any part of the overall transaction negotiated at arm’s length gramercy and its related entities were on all sides of the transactions when saratov purportedly transferred the saratov receivables to erose gramercy determined the value to be of the face_amount saratov was also promised of the face_amount however neither of these two valuations came close to the fair_market_value of the saratov receivables the amounts messrs cochran and perlman committed to invest under their respective imas were determined solely as percentages of the anticipated tax losses and did not appear commensurate with their judgment of gramercy’s competence and track record as an investment adviser the eventual sales of the buyuk and beyazit receivables were simply an internal shuffling between gramercy’s managed accounts that as we concluded earlier had little economic significance finally the collection agreement was commercially unreasonable simply put the transactions at issue were highly structured with the only end game of generating tax losses we have noted elsewhere that there is a lack of credible_evidence showing anyone had conducted the level of due diligence commensurate with the complexity and the magnitude of the transactions at hand petitioners’ vague claim that mr helie and mr shanbrom had gone to russia to perform due diligence is simply insufficient given the many uncertainties implicated by the transactions our analysis under disguised sales concepts clearly shows saratov and gramercy did not join together for the present conduct of an undertaking or enterprise see rovakat v commissioner t c m cch pincite erose never endeavored to pursue the stated business_purpose to collect on the saratov receivables restructure the debts or seek an independent third-party buyer of the receivables this was also true for boyalik buyuk and rp capital beyazit because the economic arrangements did not change at these lower level llcs further our opinion also shows that the structure at issue was not necessary for messrs cochran and perlman to achieve their stated business objectives indeed messrs cochran and perlman incurred additional transaction costs as a result of the bdo distressed_debt structure as compared to direct investments in the gemf mr cochran’s and mr perlman’s stated desire to seek liability protection to explain why they decided to join with gramercy in the llcs was also not supported by the credible_evidence in the record as to gramercy its reason to participate in the undertaking appeared to be to earn fees that it would not have earned from typical hedge fund accounts and also to acquire new clients but these purposes bore no relationship to the stated business_purpose of the enterprise instead they were merely incentives to induce gramercy to help facilitate the tax-motivated transactions thus the parties at each step of the transaction did not intend to join together in the present conduct of an economically viable enterprise and the overall structure was not a genuine multiple-party transaction see frank lyon co u s pincite moreover as a sharp departure from its normal business practice with respect to the gemf gramercy had an equity_interest in an llc involved in the bdo distressed_debt structure that required the forming of a partnership finally the bdo distressed_debt structure was marketed as a tax_shelter to messrs cochran and perlman mr shanbrom who was the person pitching the tax sheltering product to messrs cochran and perlman acknowledged that the bdo structure was always marketed to investors as a tax_shelter for these reasons in the light of the economic and commercial reality underlying the transactions at issue we find the transactions also lacked any bona_fide profit objective conclusion in sum our unitary analysis of the two prongs of the economic_substance_doctrine shows an economically rational investor could not have legitimately expected any pretax profit potential in the buyuk and beyazit transactions which did not serve any valid nontax business_purpose we thus find the transactions lacked economic_substance accuracy-related_penalties sec_6662 and b and provides that a taxpayer may be liable for a accuracy-related_penalty on the portion of an underpayment attributable to among other things negligence or disregard of rules or regulations a substantial_understatement_of_income_tax or a substantial_valuation_misstatement sec_6662 increases the penalty from to to the extent that the underpayment is attributable to a gross_valuation_misstatement a gross_valuation_misstatement exists where the value or adjusted_basis of the property claimed on a return is or more of the amount determined to be correct sec_6662 if the value or adjusted_basis of the property is determined to be zero the gross value misstatement penalty is applicable sec_1_6662-5 income_tax regs in the court_of_appeals for the second circuit a gross_valuation_misstatement exists and thus the penalty applies where a claimed tax_benefit is disallowed for lack of economic_substance gilman v commissioner f 2d pincite an accuracy-related_penalty under sec_6662 does not apply to any portion of an underpayment however for which a taxpayer had reasonable_cause and acted in good_faith sec_6664 for partnerships we inquire into a taxpayer’s reasonable_cause and good_faith or lack thereof at the partnership level taking into account the state of mind of the general_partner 131_tc_275 under any of the three grounds on which we sustain respondent’s disallowance of the claimed loss deductions buyuk and beyazit grossly misstated the values of their bases in the buyuk and beyazit receivables thus respondent has proved his prima facie case to impose the penalties on brief petitioners did not advance any arguments or articulate any reasons as to why the accuracy-related_penalties are not warranted thus we find that petitioners have conceded the issue and sustain respondent’s determination of the penalties 124_tc_223 aff’d 652_f3d_1042 9th cir see also 116_tc_438 any arguments not discussed in this opinion are irrelevant moot or lacking in merit to reflect the foregoing decisions will be entered under rule